Today, not much has changed. The shares are dipping from highs of near $58 and now stand around $47, but the company has since grown its earnings and store base. So is it worth buying now?
Costco is dipping at the moment due to some margin problems, which have led to somewhat pessimistic comments about earnings growth for the near future. Reduced sales of some of the higher-margin items in the stores, particularly jewelry and furniture and flat panel TVs, have been taken by some as a portent of a weakening economy, and by all, including management, as a portent of weaker near-term earnings for Costco.
But this is a temporary blip, in my opinion -- here's what I think we have to like about Costco:
- Costco is continuing to grow its store base, with 20+ new stores coming online before the end of this calendar year to add to the 487 now in operation (including 358 in the US and smaller operations in Canada, the UK, Korea, Taiwan, Japan and Mexico). Sam's club is a little bigger at 567 stores, and BJ's, which is a regional East Coast club chain, has 167, but I see plenty of room for US and international expansion for all of these chains. Costco has said that they believe there's room for at least 600 stores in the US, and that they could easily double the store count in most of their international markets if they can find the land, to say nothing of opportunities in other countries.
- Overall sales growth continued to be quite good last year at 8% overall (higher overseas, lower in the US).
- Core sales and margins remain fine for the 8-packs of mayonnaise and the 74-gallon jugs of laundry detergent. The problems are really just with the high-ticket items, which you can argue are the cyclical part of Costco's business.
- Gasoline prices continue to be attractive at Costco stores, which may not help with their overall margins, because gas margins are being squeezed, but the low prices should help keep membership renewal rates high (they're already well into the 80%+ range) as gas prices remain visibly high. I think gas prices will have the potential to continue to be almost a loss-leader for Costco as they keep membership benefits in the front of their customers' minds.
- The dividend, while small, is growing quickly -- it has been increased by close to 15% a year in each of the last two years and might become significant in the near futuer if these increases continue.
- And on a personal note, I like shopping there, and I appreciate the way they treate their employees. I think their HR policies also help to keep service levels high, as folks don't see working at Costco as a dead-end job that will keep them in food stamps forever. The fact that Costco employees get a better work environment and better health and retirement benefits than the average WalMart worker does make me feel better about shopping there, and it also shields them from the anti-big-box backlash that seems to follow WalMart everywhere they try to go.
Costco is still not quite cheap; they're trading at more than a 20 PE on current year earnings estimates of $2.23-2.26, which is a lot, if you look at this year's somewhat stagnant earnings growth as a new norm, but it's been a long time since this company could have been considered genuinely cheap. And management has been more optimistic about 2007 prospects, though they don't issue real guidance.
I have not yet bought any Costco shares, but I continue to be tempted. Maybe it would push me over the edge to buying shares if they threw in a big screen TV or a 12-pack of creamed corn with my share purchase. Or maybe a month or few of really bad same store sales comparisons, as we saw with Chico's, will push the share down further to real bargain territory.
There are many of companies I'd like to own, but can't quite justify buying yet: United Postal Service (UPS), Embraer-Empresa De Aeronutica (ERJ), Steamship Co. Torm (TRMD), Footmaxx Holdings (FMX) and Diageo (DEO),with COST at the top of that list. I'll keep watching, and hope that I've got cash available when the scales tip far enough in my favor.