Costco Deserves A Larger Premium

| About: Costco Wholesale (COST)
This article is now exclusive for PRO subscribers.


Costco same store sales have accelerated since the financial crisis.

Performance gap relative to broad retail has also widened.

Valuation has compressed, offering investors a great buying opportunity.

Costco (NASDAQ:COST) has become the 4th largest retailer in the US and also the 4th largest retailer in the world (with only 71 stores outside North America). Unfortunately, investors are treating this powerhouse as if the best days are behind them.

I, like many Costco shareholders, get the monthly emails detailing sales growth. All too often these announcements are met with some sell side note noting how the growth fell short of their expectations, pouring cold water on the share price for a few days or a few weeks. A common problem with the sell side, this constant focus on short term performance, they continue to miss the forest for the trees. In the charts below I will detail what has happened to same store sales over the past 14 years and how this compares to a broad base of consumer spending, as measured by the US PCE.

Source: Costco, US Dept. of Commerce

A number of things I would like to point out here. Costco has put up positive same store sales for 13 of the last 14 years, the only exception being the financial crisis. Costco same store sales have also exceeded personal consumption in all but two years (2001 & 2009). On average over these 14 years, Costco has an average sales growth of 7% compared to the PCE at 5%.

But this gets very interesting when you break the data into two time series. Let's take a more detailed look at 2000 to 2008 and 2010 to 2013...

Costco Same Store Sales US PCE
Pre-Crisis (2000-2008) 7% 5%
Post-Crisis (2010-2013) 8% 4%

Going into the crisis, Costco was leading the PCE by 2% on average - the same amount that we detailed above as the longer term average. Coming out of the crisis, PCE has slowed to 4% - not surprising given all the headlines about low wages, high unemployment and a challenging retail environment. However, during the same time period Costco has not only been able to buck the trend but has both accelerated sales growth relative to its own history 8% vs. 7%; and extend the lead compared to the PCE - 4% on average vs. 2%.

But this is all known, right? So clearly it's priced in the stock? In reviewing the historical valuation, Costco traded at an average 25x earnings from 2000 to the end of 2008. Since the beginning of 2010, the valuation has averaged 24x. The company is growing 14% faster and trading 4% cheaper - seems a little strange.

One last point to try to highlight exactly how impressive this growth has been. Costco's largest competitor is Sam's Club, part of Walmart (NYSE:WMT). Sam's Club operates over 600 stores in the US and Puerto Rico compared to Costco's 400+ in the US. In the years since the financial crisis, Sam's Club has averaged 4% same store sales growth or half the rate of Costco.

Take advantage of this opportunity while you can, the power of compounding is on your side with Costco and before you know if they'll be showing up as the #3 retailer worldwide.

Disclosure: The author is long COST. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.