Charlie Munger, one of the most successful investors in the world, always advises investors to invest in a quality business for the long run and ignore short-term market fluctuations. What is his favorite long-term investment candidate, other than Berkshire Hathaway? Costco Wholesale Corporation (NASDAQ:COST).
He mentioned that Costco could be considered "one of the most admirable capitalistic institutions in the world." Jim Sinegal, the company's co-founder and former CEO was "one of the most admirable retailers to ever live on this planet." Let's take a look at Costco to see why Charlie Munger admires Costco so much.
Its sticky business model Who does not want to buy high quality merchandise at the lowest possible prices? Costco has always tried its best to help consumers do this. By selling quality merchandise close to its cost, the company has built a very loyal customer base. However, in order to shop at Costco, customers have to be members first. This is a great marketing tool that increases customer loyalty, and it also creates another reliable revenue stream for the business.
For fiscal year 2013, Costco generated nearly $2.29 billion in membership fee revenue, which accounted for nearly 2.2% of its total revenue . Moreover, to ensure the best customer service possible, the company will accept returns for most purchases (except electronics), and it also provides a full refund on its membership fee. This gives customers peace of mind when they shop at Costco.
Comparable store sales growth Recently, Costco has reported nice growth in its comparable store sales, which was much better than those of Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). In the past quarter, Costco posted a 5% increase in its U.S. comparable store sales , while Target's comparable store sales growth was only 1.2% in its second quarter. Wal-Mart performed the worst with a 0.3% decline in U.S. comparable store sales. For the fiscal year 2013, Costco delivered 6% growth in comparable sales for the entire company.
Better return and turnover Compared to Wal-Mart and Target, Costco enjoyed a higher return on invested capital, as well as higher turnover.
|Net margin (%)||Asset turnover||ROIC (%)|
Looking at this table, we can clearly see that Costco has traded its net margin for higher turnover. Although its net margin is the lowest among the three at only 1.94%, its asset turnover is the highest at 3.63. Consequently, Costco has the highest return on invested capital at nearly 13.5%. Wal-Mart and Target's return on invested capital were only 12.23% and 8.34%, respectively.
Some investors might worry about Costco's low net margin, but this is not necessarily bad. Costco has a low net margin because it sells high quality merchandise at the lowest possible price, which could drive more purchases and build customers' loyalty. Second, Costco has a lower net margin because it pays its employees well. Its hourly rate for full time employees is around $20.89, which is much higher than Wal-Mart at only $12.67. Higher pay means happier employees and lower employee turnover.