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Membership Fees, Costco Wholesale Corporation (COST)’s Main USP: Wal-Mart Stores, Inc. (WMT), Target Corporation (TGT)

Costco Wholesale Corporation (COST)There is no doubt that Wal-Mart Stores, Inc. (NYSE:WMT) is one of the the world’s juggernaut companies, with more than 10,00 stores in 25 countries and $469 billion in sales. But lets take a look at how Costco Wholesale Corporation (NASDAQ:COST)
fares against the giant Wal-Mart and its other competitor, Target Corporation (NYSE:TGT).

Costco operates membership warehouses offering branded and private-label products in a range of merchandise categories. As of Nov. 25, 2012, it operates a total of 641 warehouses across the US, Canada, Europe and Asia.

For the last 10 years Costco Wholesale Corporation (NASDAQ:COST) has been reporting consistent sales growth, with a CAGR from 2008-2012 of 6.5%, reporting an increase in every year (except for 2009).

Although lower than its peers, Costco has been posting stable operating margins. It’s imperative to note that the company sells its goods almost at cost. Hence, most of its profits comes from its membership fees (explained below).  It is a well known fact that suppliers to Costco Wholesale Corporation (NASDAQ:COST) and Wal-Mart Stores, Inc. (NYSE:WMT) do not have any bargaining power. For instance in 2009, Costco wasn’t satisfied with Coca-Cola’s prices, and hence simply stopped carrying Coca-Cola products.

Costco has high cash flow visibility given its increasing income from membership fees. Cash flows have been mainly utilized for its expansion plans and returning cash to its shareholders through share repurchases and dividends (as seen in the charts below):

Source: Company filings

Its USP – Strong Membership

Costco’s uniqueness lies in its membership fees. It charges a yearly membership of $55 to $110 to access its warehouses, something which most retailers do not do. Membership fees for 1Q13 have increased 14% to $511 million, and Costco’s member count has increased from 58,000 in FY10 to 67,000 in FY12 (CAGR of ~7.5%).

Costco Wholesale Corporation (NASDAQ:COST)’s primary concern is its customers, and this is well reflected in its 2012 customer renewal rate of 86% worldwide, and 90% in the U.S. and Canada, as well as continued increasing penetration of the $110 year executive membership in the U.S. and Canada (as per 1Q13 Earnings Call). Renewal rate continues to be strong despite Costco increasing its yearly membership fee by ~10% in November 2012. Besides giving its customers great deals, it also offers its customers a satisfaction safety net, wherein if a member claims that a product or a membership does not measure up, Costco promises a refund at 100% of the purchase price.

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