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Costco: Why This Brick-And-Mortar Retailer Will Not Crumble

David Zanoni profile picture
David Zanoni


  • Costco is still posting comp store sales gains in the face of a challenging retail environment.
  • The recent drop in the stock is unjustified.
  • I expect the stock to achieve strong double-digit gains over the next year.

Most retail stocks have been underperforming recently as investors fear Amazon (AMZN) will continue to take sales away from traditional brick-and-mortar retailers. Amazon’s threat is evident as some retailers such as Macy’s (M), Target (TGT), and J.C. Penney (JCP) have been struggling with year-over-year negative comp store sales. One bright standout brick-and-mortar retailer that remains strong in this environment is Costco Wholesale Corporation (NASDAQ:COST).

Costco continues to achieve comp store sales gains. The company achieved a 5% increase in comp store sales for Q3. Costco’s comps increased 3% for the past 36 weeks. I think Costco is not as susceptible to Amazon’s threat as some of the other retailers. Costco offers many heavy bulk items such as cases of water and other beverages and dog food that is too expensive to purchase online because the high cost to ship it is passed on to the consumer.

Although you can buy a case of water on Amazon, the price is more like buying a case of beer. Only the most homebound people would fork over $14 to over $20 for a case of 24 bottles of water (Amazon’s prices) to be delivered to their door. That’s $0.58 to $0.83 a bottle. With bulk purchases at Costco, customers can get water for as low as $0.20 per bottle.

Costco also has attractive displays for fresh food such as meat, poultry, seafood, etc. Most consumers prefer shopping in physical stores for groceries instead of online according to a Market Track survey. That’s probably why Amazon is in the process of acquiring Whole Foods Market (WFM). There are numerous opinions on this acquisition, but I think Amazon just wants to have a physical grocery store presence, which may include store to home delivery services.

Business Insider did a study and found that Costco’s prices

This article was written by

David Zanoni profile picture
Through diligent analysis, he is ranked in the top 1% of blogging analysts on Tipranks.com for performance and accuracy. David previously contributed to Kirk Spano's Margin of Safety Investing [MoSI] Marketplace Service and Risk Research Inc.David focuses on growth & momentum stocks that are reasonably priced and likely to outperform the market over the long-term. He is a long term investor of quality stocks and uses options for strategy. David told investors to buy in March 2009 at the bottom of the financial crisis. The S&P 500 increased 367% and the Nasdaq increased 685% from 2009 through 2019. He wants to help make people money by investing in high-quality growth stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (162)

Rookie IRA Investor profile picture
Here's a funny thing. Last summer signs went up just down the road from where I live saying that a new Costco was under construction and would be opening in the fall. It is still not open and the construction looks like it has a way to go. Odd!
Oh !!! Forgot to mention the location I shop opened an employee parking lot far enough down the road so as not to take spaces from moochers who go in for a gourmet meal at the sample center.

The lot is not that far away. There may be helicopter service coming in the near future. It will be without a pilot. Word has it that they ($COST) will be selling drones and choppers in the near future.
Alie....I heard that too. I can see their drones carrying my 4# containers of mustard to my car for me already. And why not in-store drones you can send while waiting in the checkout line to get that rotissary chicken you forgot you wanted...

I'm beginning to wonder if there might even be room for a $15 "observation membership" for those who don't like Costco but still want to be around and watch people who are busy enjoying their lives while shopping there...
Interesting piece, thank you.
Just a couple queries/comments.
For context, I live in Japan and shop at Costco at least 1x/month, sometimes weekly.
Whenever I shop at COST I always plan on limiting it to JPY 10,000. However, I always end up walking out having spent 2-3x that amont. Part of that is impulse purchases - an inflatable boat, a popcorn popper, etc. I wonder what the average basket size is? My guess is it's more than $100, and probably increasing, helping with SSS. Do we know if SSS is growing on traffic or basket size or both?
I wonder also if, having spent $40 for an annual membership, if shoppers try to maximize their benefit by diluting the membership fee across a greater level of purchases?

BTW I actually buy water from Amazon.co.jp at prices comparable to COST. Added bonus is water is heavy so I would rather have the delivery guy do the heavy lifting.
On the other hand there are some items I buy only at COST, such as nori (seaweed) as it's half the cost of even cheap nori in supermarkets. This kind of core item logic might help with the high retention rate.
I will probably buy COST despite the high multiple.
Mike Nadel profile picture

I don't know what my average basket price is. But, like you, I usually go in thinking I'll spend X amount but end up spending Y amount. And Y amount is always more - sometimes a lot more - than X!

Then I have a $1.50 hot dog and call it a day!!

If sales slow in membership, prices can be cut.

Sam's and BJ's have revenue from membership.
allday1234 profile picture
MAybe those who feel that Costco as a company should read this NEW SA article Here is the link

It may shed a different light on those that believe the NEGATIVE THINGS about COSTCO
just a small statement

"Last month alone, Costco's sales climbed 6.3%, far surpassing their projected growth of 3.9%."

But for the naysayers maybe reading the article will help them better understand as financials are also discussed.

But we already know that some want to down play the Costco experience, however knowledge is the key unless of course they believe otherwise.

Aaron Bradley profile picture
good bit from conference call on millennials and costco

Sean Naughton

Okay got it. And then just on new sign ups and renewal rates, I know Millennials are becoming a bigger piece of the store, and I think Craig mentioned something like 44% of new sign ups are actually Millennials now? Can you talk about how the Millennials are doing in terms of their renewal rates, just overall? And then I guess as an add-on there, is any color on the renewal rates for some of the promos that you've experienced or experimented with over the last couple of years on Living Social, or in social media, how the renewal rates from those programs have gone?

Richard Galanti

Yes, I can't tell you how, like the age-group called Millennials today and how they renew and spend versus 5 years ago - whatever they were called, or 10 years ago in Gen Y or Z whatever it was back then. We didn't look at that kind of data back then. We have for the last couple of years, so ask me in three years and I'll have good information for you on that. What we see though, in terms of that age-group now called Millennials, it's not that different relative to the other age-groups today than it was two or three, and four years ago, when they signed up. What we see is - we only have two good data points on the two Living Social things we did about two and a half years ago, and a little over a year ago.

We compared them to everybody else that signed up that month by just walking in or going online to sign up. What we found is due to Living Social, and I could be off a few percentage points here, on Living Social, it was about in the mid 40% range of those that signed up on the Living Social promotional effort that were Millennials. And that compared to the walk-ins that was in the mid 30%, maybe 9 or 10 percentage points difference. What we saw in terms of how much they spend over the course of the year, the Living Social - or the Millennials spent a little less each time and actually shopped a little more frequently, which is counterintuitive to me.

And in terms of renewal, they renewed about a percentage point or two higher than the walk-ins in that first year that they had to renew. Again, a little counterintuitive to me. Maybe it is not statistically meaningful because again, this is its first year, it's one or two percentage points. But at least it gave me comfort personally, that we're not losing them and they are coming in. What we've also seen, and what we believe, when I look at the curve of who spends the most at Costco, it's the - they start spending - the peak is, if I separate people from 25 to 80 years old in 11 age-groups, the peak is the fifth and sixth age-groups, which are 45-49 and 50-54, and a nice increase going from 35-39 up to 40 and 44 before that.

Well, might be that makes sense. Maybe they are getting married, maybe having kids, maybe getting married later having one less kid, who knows. But once they do that, then they start making more money, they spend more. They have more mouths to feed and they are making more so it's again, this is looking at a chart, not doing a lot of statistically significant analysis.
Prudent Man profile picture
And yet revenue growth, for both retail and membership fees, has been declining dramatically.
Aaron Bradley profile picture
earnings are accelerating...
Mike Nadel profile picture

Revenue growth for membership fees is declining?

I'm not yelling at you, I legitimately did not know that. Can you please provide the source for that information? The last time I looked at their numbers, that was not the case.

Prudent Man profile picture
As a pure retailer it probably trades a 100 p/e.
Prudent Man profile picture
As a business Costco is currently terrific; as an investment not some much.

Paying 27 times for mid-single digit eps growth just doesn't do it for me, especially when membership fees are most of those earnings. God forbid shoppers tire of this type of shopping experience and memberships stall or decline (remember this remains a relatively new concept for which the excitement could wear off reducing membership fees). Also millennials could postpone their migration to the suburbs, or worse take their on-line shopping preference with them when they do go. Also, at some point, we simply have a recession.

Any of the above puts the stock at a 15 p/e and a world of hurt for Costco shareholders for which a 1.3% dividend won't compensate. The recent 3 p/e point decline just doesn't do it for me at all.
Aaron Bradley profile picture
God forbid shoppers tire of this type of shopping experience and memberships stall or decline (remember this remains a relatively new concept for which the excitement could wear off reducing membership fees).

costco has been around for 35 years...

i'm a millenial. all my friends are millenials. there is a costco right downtown and all my friends shop at it because why wouldn't you?
Back when my 3 boys were "sprouts" we bought milk at Costco for about $1 per gallon less than the competition. At 7 gallons per week, that alone added up to about $365 per year. Membership at the time was about $25. Milk pricing has changed since and the 3 boys are long gone, but the point is that the membership fee is more of a ticket to saving real money at Costco than any kind of detriment.

And don't forget the rebate available from Costco on all purchases if you have an Executive membership, and the other rebate on top of that from Visa for using their card.

Any brick and mortar retail store today that has an overflowing parking lot is doing something their competition is missing.
Stock has more room to head higher.

They will in time sell more online and there are many locations where they can build.
Nobody mentioned Hearing aids I saved 50% on well known brands The person who fitted me was well qualified I love Cosco!!!!
Don Hindman

Nobody mentioned Hearing aids I saved 50% on well known brands The person who fitted me was well qualified I love Cosco!!!!

Don, add the eye care dept and pharmacy where membership is not required.
Vandooman profile picture
Well my take is Costco has a lousy dividend regardless of whether it is growing. The PE requires profit growth to justify it and any reduction in growth would hammer the stock. You are making a bet on growth. Most of the company's profits come from the annual membership fee. So it stands to reason you have to grow the membership fees to justify the PE multiple. Instead of analyzing the growth in stores we should be analyzing the growth of membership. You can only go so far with increasing the fee. From the last 10K, membership had increased by 7% year over year. So what PE does that justify? Profit should also increase by about 7%.
allday1234 profile picture
I agree the dividend is not that good although they did pay a $7 special dividend last year. But you can't count on that and .50 a share is not a lot. Your question on membership is a good one. I do not know and I suppose every metropolitan area is different. There is about 3M people in my area and they have 3 locations. Sam's has 6 locations and there are no other wholesale clubs in my area.

Membership revenue totaled $2.4 billion last year, up 6% from 2013. Meanwhile, Costco booked $3.2 billion in total operating profit. and that was before the $5 and $10 membership went into effect so the answer to your question is probably not.

I do not know if you contacted investor relations if there would tell you but it should be public information
Mike Nadel profile picture

I agree about the dividend. I own COST, MCK, NKE, SBUX, AAPL and a few other sub-2% yielders, and I didn't buy them for their divvies but for expected capital gains. I view the divvies as a bonus on companies like those.

Hello David thanks for article. You should also discuss a multiple the company should deserve or some sort of explanation why you believe the price will rise in next 2-3 years
smurf profile picture
I must be the only one not to totally worship at the altar of Costco.

I am a member, but only because they have some things that neither of the other warehouse clubs (Sams and BJ's) have. It's also vice-versa, I might add. Also, their on-line service is very good. On electronics, they add on a year warranty to the mfrs.' and also provide lifetime 'how to' help.

I find their physical stores quite sterile and boring. It's like walking through a hospital corridor. Their personnel are neither particularly congenial nor helpful. The stores I frequent don't have a fresh deli, nor do they custom cut meat.
allday1234 profile picture
Costco stores do not have a DELI and is not a butcher shop.Shopping at Costco is a personal choice and YOU DO NOT HAVE TO SHOP THERE. My interaction with the employees is the front entrance where a person checks member-ship cards and counts the people The Cashier and occasionally the service desk of the refreshment or eating area. And of course the person who checks your purchased merchandise. It is also similar to a Sam's wholesale place except Sam's has a much bigger store and a larger selection.
The food servers who give out samples of certain foods or products are not employees of Costco but work for an outside company. At the cashier I have always been asked if I found anything and sometimes I am asked if I need stamps.

Like me, empty nesters may start dropping membership. With increasing membership costs and reduction in dollars spent the savings are diminishing. Convenience and competition may eventually change babyboomers shopping habits. Costco will continue to do well for foreseeable future but at current growth rate is fully valued. Recent drop of 15% was a reality check.
Mike Nadel profile picture

I am a 50-something empty nester who is long COST and enjoys shopping at Costco. I just had the new $120 membership fee show up on my credit-card statement.

I think Costco will continue to thrive, but I acknowledge that it will be interesting to see how the membership retention numbers are over the next few months.

If loyalty continues - if 90% of cardholders (or close to it) continue to renew their memberships - Costco will be in sensational shape. If 5% or 10% or more do what you did and cancel, it will be a bad sign.

I'm looking forward to finding out!

Mike Nadel, Contributor

I am a 50-something empty nester who is long COST and enjoys shopping at Costco. I just had the new $120 membership fee show up on my credit-card statement.
I think Costco will continue to thrive, but I acknowledge that it will be interesting to see how the membership retention numbers are over the next few months.
If loyalty continues - if 90% of cardholders (or close to it) continue to renew their memberships - Costco will be in sensational shape. If 5% or 10% or more do what you did and cancel, it will be a bad sign.
I'm looking forward to finding out!

Hey Mike --

It would be interesting to know how many new families or singles join vs. the ones who do not renew.

Membership is growing yearly so there is the answer.

Mike Nadel profile picture

I agree that it's the answer for now. Costco just raised its membership fees, there is more competition than ever, and America is getting older. So we'll see if it's also the answer a year from now.

I think it will be - I'm betting on it with my investment, in fact - but I'm no soothsayer. I bet on KMI, GILD and TGT, too!

One big plus not mentioned in the article is "the adventure" appeal of Costco. You never know what you'll find there that you need, or think you need. One commenter said it is one of the few stores he likes to shop at. It's the only store I like to shop at. I noted that a couple of people mentioned spending about $150 per visit. Ironically, I rarely spend less than $150 there, even if I only go to buy a 3 pound can of finely ground French roasted coffee for about $12 and a few bottles of wine.

I've been wanting to own COST for years but couldn't rationalize the PE ratio. The current downdraft is tempting me to buy. I'll wait until it looks like the bottom is in, and then pull the trigger. I'm a little concerned about the Whole Paycheck purchase by Amazon because nobody knows why it's being done, but I have confidence in Costco's business plan and think the probability is quite low that COST will suffer as Amazon continues its blitzkrieg.
xray67 profile picture
I think CostCo represents a great combination of quality and value. Virtually none of what I purchase at CostCo on a regular basis (mostly food, some office supplies), or am considering purchasing after being there (like new garage doors, car tires, big-screen TV, backup generator) would ever be Amazon purchases for me. Biggest risk as pointed out by Middlepath is POTUS and the trade war risks, as a lot of the generally excellent fresh foodstuffs come from across our borders.
ote profile picture
Wanted to own COST for a long time. Closer with the recent drop but still too expensive.
Middlepath profile picture
The recent numbers showed sales growth rates in Canada and Mexico were not so good. I think the reason for that is due to the extremely bad attitude displayed by the current potus towards border issues, and renegotiating the free trade agreement, etc. I think his actions taken so far have been appalling. I'm just one person, but after 10 years of shopping at Costco in Canada, I immediately stopped shopping there, and I may never go back. I have stopped shopping at all US retailers located in Canada. I realize it is not the fault of a retailer, and out if their control, but I am too nauseated to enter the store. My other disappointment was their dependence on food shipped great distances, burning diesel all the way, contributing to climate change. Also by having fewer product selections, it was not easy to find low sodium processed foods.
Your joking right ?
allday1234 profile picture
Really the figures do not support your statement

Costco Wholesale Corporation Reports June Sales Results

ISSAQUAH, Wash., July 05, 2017 (GLOBE NEWSWIRE) -- Costco Wholesale Corporation (“Costco” or the “Company”) (Nasdaq:COST) today reported net sales of $12.17 billion for the month of June, the five weeks ended July 2, 2017, an increase of seven percent from $11.33 billion during the similar period last year.

For the forty-four weeks ended July 2, 2017, the Company reported net sales of $104.28 billion, an increase of six percent from $98.51 billion during the similar period last year.

Comparable sales were as follows:
5 Weeks 44 Weeks
U.S. 6.5 % 3.9 %
Canada 3.2 % 4.0 %
Other International 6.2 % 1.3 %

Total Company 6.0 % 3.6 %

You do not have to shop at Costco, but to not do so because of you dislike for our President is funny, but as always your decision.
To Middlepath: Please stop shopping in U.S. stores and while you are at it, please tell all your Canadian Brethren, that come to South Carolina Beaches (for the entire winter) to stop coming and taking advantage of the low cost of living in South Carolina as well as the wonderful weather, restaurants, shopping, day trips, boating/water sports, cheap condo/hotel rentals, and cheap real estate market. Once they all get the Hell out of my way (since I live here) it will make my life easier, and I won't be as "nauseated" every time a Canadian Driver (you can tell by the license plates) gets in front of me (on the roads) and drives 10 mph below the posted speed limits as well as they don't have a clue where they are trying to go or how to get there.

South Carolina was instrumental in getting Donald Trump elected as President of The United States. If you and any other Canadians don't like U.S. Companies because of the POTUS, simply don't buy any American products, don't go to U.S. Franchised businesses, and stay out of the U.S. (The country). I can honestly say I have never been to Canada, and I have no intentions of going and I could not tell you who the Canadian President/Prime Minister/Leader is. And I could care less.

Ignorance begets ignorance. :)
16 Jul. 2017
I have seen shares prices of very good companies run ahead of the companies earnings, and wait years in flat patterns while the companies earnings catch up to the shares prices; the P/E ratio getting more compressed each year.
Risk Hunter profile picture
I agree that Costco has more going for it than most b&m retailers and is not in trouble, but the stock is nowhere near cheap enough for me to buy at 24x. 15x maybe I would nibble. The article makes many good points but the one about the company earning higher returns on account of faster turnover due to bulk sales is sheer nonsense. Sales are sales and a dollar of sales in a product moving fast is fundamentally no different from a dollar in a slow mover. Gross and net margins times sales of whatever kind are the drivers of ROIC.

High volume items have certain benefits but the volume also adds costs - more transportation, shelf space - so it's not necessarily good to have a fast selling bulky item as it depends a lot on the margin on the item.
David Zanoni profile picture
Risk Hunter,

The reality is that Costco will probably never have a forward PE of 15 - maybe after a recession, but not likely any time soon. Certain momentum stocks will trade with above average valuations and Costco is one of them. Costco's strong comp store sales increases is why investors award the stock with an above average valuation.
But why should increasing comp store sales matter when almost the entire profit comes from membership fees? i.e. minimal margins. Seems to me only membership renewals and increases in fees should matter.
cpa28761 profile picture
Fgh, were it not for the shopping experience, would COST be able to collect membership fees? They first have to provide stocked facilities. You cannot separate the membership fees.
cpa28761 profile picture
I still can't believe it. Most of the comments here are songs of praise for SHOPPING at Costco. There seem to be a paucity of analysis of COST's business model from an INVESTOR standpoint.
That's because in the world of stock investing, sentiment often trumps fundamentals and "business models." There is a "beauty contest" element to it that Graham and Dodd didn't capture. That's why the FANG stocks and TSLA's have been going thru the roof while F has been stuck at about $11.

PS....COST's business model is probably close to perfection in the retail world of bricks and mortar.
cpa28761 profile picture
>>>That's because in the world of stock investing, sentiment often trumps fundamentals and "business models." There is a "beauty contest" element to it that Graham and Dodd didn't capture. That's why the FANG stocks and TSLA's have been going thru the roof while F has been stuck at about $11.<<<

There was a time when the beauty contest valued CSCO at 200X earnings with a growth rate that would have made it 1/6 of the GDP of the USA five years forward. Its fundamental business model did not support the irrational exuberance and look what happened. Ditto (or worse) for many other of its contemporary darlings.

Investors love to think they're getting in on the ground floor of "the next big thing". A hundred years ago, KMB was high tech with its innovative cellucotton that is still sold today. Quite often, the perceived "next big thing" is an illusion.

>>>PS....COST's business model is probably close to perfection in the retail world of bricks and mortar.<<<

For the shopper or the investor? It is less profitable than WMT. Its ROS is 35% less than WMT's.
There are more than plenty of examples of "darlings" that have crashed and burned as well as stocks with the finest fundamental pedigrees which never seem to go anywhere. CSCO is an example of both....once the new "backbone of the internet" thought to have no upward price boundaries and then, for the last 17 years, a fundamentally strong powerhouse with the right business model that has hardly gone anywhere.

The point intended is that following sentiment can be very profitable right up until it is not, and ignoring sentiment due to lacking fundamentals almost guarantees you'll miss the next big thing until it starts to look like a dividend aristocrat.

COST is neither a darling or an aristocrat, but its price is up 178% since 2009 compared to WMT's 78%. So COST has been the better investment for both the shopper and the investor. And AMZN is nibbling far more on WMT's lunch than COST's. So, all things considered (including ROS and sentiment) COST remains "prettier" to the market than WMT.
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