Costco is No Walmart

Includes: COST, WMT
by: Faisal Laljee

Non-specialty retail is certainly not an exciting genre and the likes of Target (NYSE:TGT) and Walmart (NYSE:WMT) do not exactly inspire investors. However, there is one company that stands out from its cohorts - Costco (NASDAQ:COST).

The Costco experience is a unique one - for both their employees and their customers.

For employees, Costco has one of the lowest turnover rates in the business. In fact, turnover for employees that have been with Costco for a year or more is less than 6%. Those lucky enough to work at Costco average $17 per hour, a far cry from Walmart's average of $9.26 per hour. But the goal of this post is not to compare how Costco treats their own - clearly the above numbers speak for themselves. Actually, some would question who Costco is here to serve - investors or employees?

For customers, Costco is the place to shop. Just ask anyone who has been there. From Big Screen Panasonic plasma TV's and Toshiba laptops to Calvin Klein jeans and Cuisinart coffee makers, there is something at Costco for everyone. And somehow they know exactly the place to display their merchandise. Costco's most attractive offering is there product replacement plan on electronics, which is a free service and rivals the expensive extended warranty offered by the likes of Best Buy (NYSE:BBY) and Circuity City (NYSE:CC).
Costco shopping
Let me share with you recent experiences I had at Best Buy and Costco. I was in the market recently for the XBox 360 and my first instinct was to head to a local Best Buy. I was hoping to get a packaged deal with an extra control and a couple of games, but it turned out that Best Buy didn't have it. So I waited around for a sales person to unlock the cage and pull out the $399 box for me. It was when the salesman tried to sell me the extended warranty (I believe it was $69 for 3 years) that I recalled someone telling me that Costco replaces a defective item without any extended warranty purchase, so I declined the purchase and headed to a nearby Costco.

Not only did I find the product sitting on an open shelf where I didn't have to wait around for the gatekeeper, but I was pleasantly surprised to find the exact package I was looking for. Its like Costco knew exactly what I was looking for. So I paid a little more for 3 extras that would have cost me a lot more, but which I would never have bought at Best Buy separately. And the product was at a $20 discount than the list price without the hassle of a rebate. Now that's a home run!

This is just one example of how satisfying the Costco experience is. For the dual income family, Costco offers in store food sampling, coupled with gourmet wines, packaged dinners and fresh produce enticing these nine-to-fivers to shop Costco for dinner.

For the avid golfer, they offer Callaway golf bags for a low price, and Maxfli Noodle golf balls a lot less than they would be at the pro shop. For the wine connoisseur, Costco has a large collection of reds and whites and for those with a sweet tooth, they have great packaged candy and nut gift baskets, fabulous cream cakes and the best pumpkin pie I've ever had.

So what is there for investors? Well a 1% dividend for starters, and 16% earnings growth. And this with less than 500 stores, a lot less than its competitors. Their market is far from being saturated and they can grow another 10-15% just from new store openings annually.

I recommend a buy on Costco and I believe the pleasant shopping experience, low prices and happy employees make for a great story - a story that will keep investors happy for years to come.

COST 1-yr chart:

Costco chart