Costco, the Best Club in Town

Includes: COST, WMT
by: Hilary Kramer

I am the biggest fan and certainly one of the most indulgent shoppers that Costco Wholesale (NASDAQ:COST) has ever enjoyed. Costco is the largest warehouse club retailer in the United States and only second only to Home Depot (NYSE:HD) in income with over $53 billion in revenues last year. What’s more, Costco is one of the few stores that can actually compete with Wal-Mart (NYSE:WMT), with its stores averaging 50% more annual sales than Wal-Mart's Sam’s Club stores. Unlike Wal-Mart, Costco is well-run and in good shape -- and is one to keep an eye on as a potential pick.

I like Costco for lots of reasons. They have a loyal customer base (starting with me and my mother and extending to everyone I have ever known), and their customers continually renew their yearly required memberships. They have a wide selection of products which frequently change and which include higher end items among the bulk selections found at all warehouse club retailers.

And importantly -- the company is excellent to its employees! The average hourly wage at Costco is $17. It is only $10 at Wal-Mart. For health premiums, Costco’s employees contribute 10%. At Wal-mart, employees must give 33%. Paying extra attention -- and dollars -- to employees can pay off. Happier workers means less employee turnover which means lower training and recruiting costs. It also means better customer service. Where will the customer turn when she can get the same discounts at two different stores? Answer: the one which makes her shopping experience better. If I had a dime for every time I’ve heard people griping about crummy service at Wal-Mart or Home Depot, I’d be a very wealthy woman. Happy employees make for a happier shopping experience – which can be found at Costco.

The downward turn in the economy is hitting all retailers, and Costco isn’t immune. It just lowered its 4th quarter earnings forecast very slightly, due to lagging sales in electronics, apparel and furniture – all of which needs to be further discounted to move off the shelves. But compared to stores like Home Depot or Wal-Mart, Costco smells like roses to me. August’s sales at stores open for over a year increased 7%, a tough feat for a retailer to accomplish when the publics’ pocketbooks feel pinched. And what’s more, the higher end consumer is now heading to Costco rather than the supermarket

Type of stock:
A large-cap specialty retailer that has set the standard for warehouse club retailing. Exceptionally run, this is a company that continues to grow. While compensating employees has led to lower margins, it also has led to less turnover and to better service. Costco also is adding higher-end private label merchandise to its offerings, which will likely improve margins.

Price target: Hovering in the $47 range, Costco might not be quite at the bargain rates offered in their stores, but it is off its year high of nearly $58 and is probably worth what it is trading for right now. If you see Costco dip into the $30s, or even the low $40s, I’d pick it up.

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