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Costco: The King Of Retail

Jae Jun profile picture
Jae Jun


  • What type of deep insight you gain by analyzing cash conversion cycles of Costco and competitors.
  • How to interpret and compare the CCC ratio to uncover potential catalysts.
  • The beauty of negative cash conversion cycle.

The Quick Theory

The main way a company can make more profit is to simply sell more stuff. But how do you sell more stuff?


More cash availability equals more products you can make and sell.

Wall Street loves earnings and many people believe earnings drives cash and profitability, but this is incorrect. Cash drives earnings. The faster the cycle of cash, the quicker it can be reinvested to generate earnings.

Regardless of what the media says, cash is and always will be king. No business can start or grow without cash. That's why growth and startup companies are constantly looking to raise cash.

By looking at the cash conversion cycle and analyzing the CCC formula, a company that can shorten the cash conversion cycle is going to be ahead of its competitors.

The basic theory of the cash conversion cycle is this:

  1. you start with cash
  2. it becomes accounts payables as you buy inventory from a supplier
  3. you receive the inventory
  4. the inventory is then sold and becomes accounts receivables
  5. when accounts receivables is collected, you have cash again and you restart the cycle from step 1

The entire cash conversion cycle is a measure of operating efficiency and management effectiveness. The lower the number, the quicker the cycle. The quicker the cash conversions cycle, the better the management is at operating the business.

In this way, you can use the cash conversion cycle formula to compare efficiency and management on an apples to apples basis. In other words, do not use the Cash Conversion Cycle to compare companies from different industries or different business models.

No company does this better than Costco (NASDAQ:COST).

Costco Is Unbeatable at Retail

The best way to use the Cash Conversion Cycle is to compare competitors from within the same industry

This article was written by

Jae Jun profile picture
We seek undervalued and under-appreciated stocks to go long before the market catches on. By using our universe of stock ratings and methods to quickly compress our list, we look for the best opportunities to build wealth through the stock market.

Analyst’s Disclosure: I am/we are long WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (37)

My daughter, 26, and husband just had their first child, went to Costco to get labor going and shop there all the time. They love it! Not every young family exists order drone food from Amazon
tk11 profile picture
07 Mar. 2018
Whole Food is Amazing now
joeBV profile picture
07 Mar. 2018
Thanks for your article. This is the true analysis that made me invest in COST. Their model and consistency in quality/pricing are key tools to win in a changing retailers world. PS: do not read the article about Costco and Sam’s on Business Insider!!! It seems like they never visited either store prior!!
tk11 profile picture
07 Mar. 2018
BI was an excellent article. Thank you sir but you don't need to advertise it here.
joeBV profile picture
08 Mar. 2018
Tk11 I was not advertising it, rather on the contrary I was praising the quality of this article vs. that one. Anyhow glad you read more about Costco. :-)
tk11 profile picture
08 Mar. 2018
There is more than reading about it. There is a movie, its a comedy, about the company and its management.
It's an important metric and key consideration why I bought COST, glad you point it out.
Jae, Great article all around but one key point caught my eye which was the gross margin comparison between COST and WMT. Since we can't take % to the bank but rather dollars, I did the following exercise which I found insightful. For every $100 sale COST makes, it brings in half of what WMT does in gross profit, $13 vs $26. However, based on your CCC calculations, COST generates $7.14 of gross profit per day ($13 / 1.82) whereas WMT generates $3.79 per day ($26 / 6.86). COST spits out 88% more gross profit per day! And, here's the kicker... COST's current PE is "only" 55% higher than WMT's (31.8 vs 20.4). I know, it's not a perfect correlation, since other factors may explain the differences in PEs, but it sure makes you wonder which stock is truly more expensive! Long COST.
tk11 profile picture
07 Mar. 2018
"PE is only 55% higher than WMT"? Anyone sees the absurdity of this difference on a low margin retail stock that derives 90% of its profits from full of risk membership fees?
Briar profile picture
Jae, you’ve written a useful article on Costco. Another metric worth looking at is Costco’s current ratio. If you take out the excess cash Costco operates with negative working capital. Some of this is accounting, conservative accounting. Costco ended last year with close to $1.5 billion in deferred membership fees, that is unearned income, because the fees are earned ratably throughout the year, so on average half the fees will be booked as deferred, but the cash is sitting in the bank. This deferral is recorded as a current liability, but because of the high renewal rate it is more like a perpetually renewing loan.

What really distinguishes Costco from the others is it’s membership franchise. This amounts to roughly 2/3rds of reported net income. Received up front, at the beginning of the year. The membership fee allows Costco to sell goods at lower prices. This enhances the member’s feeling of being treated fairly. Thus many of us end up spending more than we expected to. And we can buy an oversized hotdog after checking out for $1.50. It includes a Pepsi, too.

But here is another buffer: in a recession if we cut back shopping Costco still earns the deferred membership fee.

One has to admire how well Costco has thought through its business. Sure it is slow to figure out it’s online business, but last Sunday, around noon, all checkouts were open with lines, and the sales people were working efficiently and cheerfully.

Thanks for writing a fine article!
tk11 profile picture
07 Mar. 2018
Oversized hotdog is oversized junk food waiting in the food court line for an hour. You value your time a dollar an hour. Way below minimum wage!
Briar profile picture
tk11, I am well aware of your useless, uninformed comments. Keep them up and I will start reporting abuse.
tk11 profile picture
12 Mar. 2018
Briar, feel free to report abuse as many times you want. I am not receiving fees like you do or I am an employee of SA. Since you were unable to answer the points raised about Costco I raised some more in other comments.

Make believe stuck arrogance doesn't contribute to this discussion or safeguarding readers investments, only facts, analysis and logic do. You look immature with threatening in public other participants.

p.s. Hot dogs are junk food and waiting more than 10 minutes on a line to save a buck values your time to less than $6 an hour. Below minimum wage!
bobzark profile picture
Ever since I bought Costco stock for my wife's Roth IRA, the lines at Costco are much less stressful.
Well played Sir!
tk11 profile picture
07 Mar. 2018
Typical falling in extreme love. The falling out will be costly. Some people keep staying in the love-house even as empty nesters costs them a fortune and ties them down. Other people keep that old car they fell in love 10 years ago and keep driving it despite annual maintenance costs exceed its present value.
Oh something hsppening to the COST stock. Is it another breakdown? I am ready to sell half of my puts for at least a 300% profit. The rest keep that 1% dividend.
The unmeasured metric with Costco is the stress of shopping there. It is so crowded all day long.
Yogi Berra - “Nobody goes there anymore. It’s too crowded.” It’s an experience thing, samples, products you don’t see everywhere, incredible value on everything in the store.
tk11 profile picture
07 Mar. 2018
Nobody from the smart people goes there anymore, neither any young adults, the future of any company. The times of expansion and growth are gone with the departure of the founders.

Warehouses are too crowded with time wasters 65+ year old who are overrepresented, inadequate parking, freebie lines crowding aisles. Long checkouts during evenings and weekends when most people shop. Company is way behind in investing for future growth. Management are lifers ex-stock boys. Static "business as usual".

The corporate tax cut prolongs a painful death. Today's Blockbuster Video. Thoughtful analysts see the similarities. AMZN & WMT investing in online and corporate talent will dominate this field!
Jae Jun profile picture
I don't know where this sentiment is but couldn't be further from the truth looking at their numbers.

In the end, the numbers don't lie.
Wonder how Amazon would compare here.
Zissou profile picture
TGT looks interesting - lower conversion and high margins.
I love to shop at Costco and I'm long on them but their technology is behind the their competitors. Their website is primitive and no ability to have ship to store. I also shop at BJ's and their Express Scan is awesome. They need to fix their technology side or they will slowly wither over time.
Yield 1 percent not getting paid enough and just hoping all the idiots keep justifying buying the stock with this high of a pe
vooch profile picture
whopping huge special
dividends every other year
krispytoast profile picture
Every now and then Costco pays a "Special Dividend" last year it was $7 a share before that I believe they paid $7 and $5. This year they didn't pay one but this does not mean they won't be paying one in 2019.
BitterrootBrown profile picture
They will announce the next dividend in April along with any increase. It wouldn't surprise me if they added a special dividend because of the new tax policy.
06 Mar. 2018
Nice Job, this particular analysis makes looking beyond the numbers easy to understand. The conclusions here reveal an important explanation as to why Costco's recent stock valuation (in lieu of stock markets recent volatility) has maintained its lofty status relative to its peers, despite some wall street pundits (in my estimation erroneous) efforts to downgrade. I think that unlike the author, some of those pundits focus on the wrong metrics/fail to account for how well a business recycles their cash and what effect that has on a corporations ability to generate future profits. It looks like Costco is just better at it or just figured out a more efficient use that best fits their business model (read stay ahead of their competitors).
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