Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Costco Wholesale Corporation (COST) for the Long Haul

Retail is a solid sector for your investing dollars, and Costco Wholesale Corporation (NASDAQ:COST) is a great investment for anyone looking to make money from the economic recovery. Costco trades at a premium, with a P/E ratio of 23.9, and for good reason: management has steadily expanded the business, and the company’s long-term outlook is very bright. There are, however, a couple of companies, such as Wal-Mart Stores, Inc. (NYSE:WMT) and, Inc. (NASDAQ:AMZN), that appear at first glance to be threats to Costco. I argue that Costco Wholesale Corporation (NASDAQ:COST)’s plan for growth is more sustainable than, Inc. (NASDAQ:AMZN)’s, and that the stock’s long-term outlook remains brighter than Wal-Mart’s and Amazon’s. Put another way: if you have to buy one company, buy Costco; leave Wal-Mart and Amazon on the shelf.

Costco’s impressive growth story

Costco Wholesale Corporation (NASDAQ:COST)

Costco Wholesale Corporation (NASDAQ:COST)’s FY 2013 Q3 spanned the 12 weeks ending May 12. Earnings per share clocked in at $1.04 for the quarter, up an impressive 18% from Q3 of 2012. This was in part due to sales expansion of 8% and comparable (same-store) sales growth of a very respectable 5%. Costco expects to add 28 new warehouses in FY 2013, or a 4.6% increase in stores. A large piece of that expansion has been (and will be) in Japan and Taiwan, which helped account for a 19% increase in membership year-over-year. With additional new stores in those two countries, Costco has some great opportunity for immediate growth.

Worldwide, membership renewal stood at 86.4% at the end of Q3 2013. Costco is sacrificing a little in the gross margin category to lower prices, as the value perception is “driving sales, member shopping frequency, member sign-ups and renewals, and market share,” according to the company. Costco Wholesale Corporation (NASDAQ:COST) also has an e-commerce platform, Costco Online, which grew sales by over 20% year-over-year in the U.S. and Canada.

Part of Costco’s incredible story is management’s fantastic treatment of employees. With a starting wage of roughly $12 per hour and the average employee earning $21 an hour, it is no wonder that worker turnover is so low (which saves the company significant recruiting costs). Those high wages allow greater selectivity in hiring, higher worker morale, and a superior guest experience. This particularly compares favorably to Wal-Mart Stores, Inc. (NYSE:WMT).

Threat one: Wal-Mart

Wal-Mart is the obvious threat to Costco Wholesale Corporation (NASDAQ:COST), given that its Sam’s Club concept is a direct competitor. Wal-Mart’s strategy is to slash costs and thereby offer products for cheaper than its competitors. Unfortunately, when this strategy is implemented, customer satisfaction suffers. A customer’s experience with store employees drives their satisfaction with a store visit, and poor employee pay results in lower employee morale and therefore a weaker guest experience at Wal-Mart Stores, Inc. (NYSE:WMT).

Same-store sales decreased by 1.4%, and EPS growth was anemic ($1.14 for Q1 of FY 2014, which aligns most closely with Q1 of calendar year 2013, compared to $1.09 for Q1 of FY 2013).

Wal-Mart has additional problems; its low-road strategy was not sufficient to avoid cannibalization by the dollar-store segment of the market, which performed quite well throughout the recession. Wal-Mart is increasingly squeezed between the superior customer experience at Costco, the price-undercutting from the dollar store and Amazon end of the market, and its own worker dissatisfaction (including a nascent but growing union movement).

As the company struggles to better define its niche, I expect comps to remain relatively flat (management is calling for flat to low single-digit growth this next quarter, for example). Wal-Mart has not defined a business vision that threatens Costco Wholesale Corporation (NASDAQ:COST)’s model.

Threat two: Amazon, Inc. (NASDAQ:AMZN) is a threat to all retailers due to the prevalence of “show-rooming,” when a customer test-drives a product at a store and then buys it for less online. A recent survey found significant crossover between Costco and Amazon Prime members, which may indicate susceptibility to show-rooming.