Costco Wholesale is a membership warehouse club providing branded merchandise at low prices to its members. It is the world’s third-largest retailer. The company primarily caters to small- to medium-sized businesses. It also operates self-service gasoline stations at a number of its U.S., Canada, Australia, Japan, UK, Spain, Mexico, Taiwan, and Iceland locations. The U.S. and Canada are major Costco’s markets accounting for nearly 85% of total sales. It also operates 24 depots for the distribution of merchandise to warehouses and other facilities. Other International market sales account for the remaining 15% of sales.
Costco sells a wide variety of products ranging from foods, and sundries, to equipment, television and furniture, and apparel, health and beauty aids. It also has a growing online presence with 4% of its total revenues coming from e-commerce sales. The company caters to more than 55 million households, and over 100 million cardholders. A division of the company, Costco Wholesale Industries operates manufacturing businesses, including special food packaging, optical laboratories, meat processing, and jewelry distribution.
- Opportunity Score: 61
- Ticker: NASDAQ:COST
- Sector: Consumer Defensive
- Industry: Discount Stores
- Market Cap: 165.28B
- P/E: 41.55
- Dividend Yield: 0.75%
- Payout Ratio (Earnings): 31.04%
- S&P Dividend Aristocrat: NO
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 10/10
- Dividend Income Fit: 5/10
Revenue Growth & Market Exposure
Costco provides both national branded and private-label products across various merchandise categories ranging from food, sundries, hairlines, fresh foods, softlines, and ancillary. A wide selection of merchandise, specialty departments, and exclusive member services are reasons why customers flock towards Costco. The company has developed a reputation for providing good quality products at low prices to its members. Costco’s membership base is growing with a renewal rate of 91% in the U.S. and Canada, and 88% on a worldwide basis in 2019. The company derives nearly two-thirds of its profits from memberships.
Costco purchases its merchandise directly from manufacturers and sends it directly to its warehouses. This eliminates multiple-step distribution costs and allows the company to sell at low prices. High sales volumes, rapid inventory turnover, efficient distribution, and self-service warehouse facilities ensure high operational efficiency. Rapid inventory turnover is one of Costco’s key advantages. The company even ends up selling inventory before they have actually paid for it.
Costco’s latest quarter was negatively impacted by direct expenses of $0.47 per diluted share from incremental wage, safety, and sanitation costs related to COVID-19. However, net sales for the quarter increased by more than 7%. The company witnessed some decline in its shopping frequency worldwide but e-commerce sales reported an increase of more than 60%. Costco operates e-commerce sites in the U.S., Canada, the UK, Mexico, Korea, and Taiwan. The company provides two-day delivery for non-perishable food and household items and same-day delivery for groceries. The company also has plans to launch e-commerce operations in Australia and Japan in FY2020. The company’s strategy of initiating self-checkout in the U.S. and Canada and pickup lockers should prove to be successful now more than ever.
Costco’s strong balance sheet and a low payout ratio sitting near 30% have helped the company increase its dividend at a rate of more than 13% CAGR over the last decade. The company last raised its payout by 7.7% from $0.65 to $0.70 per share and sports an annual yield of 0.90%. It has also paid special dividends thrice in the past. The company has grown its earnings per share at more than 12% CAGR per annum in the last decade.
Costco’s massive scale gives it an upper hand while dealing with its suppliers. The company operates at a low overhead cost which also enables it to pass savings to its members. Costco continues to make investments in logistics and vertical integration. It expanded its depot operations and rolled out the first of several planned e-commerce fulfillment automation operations.
Costco is focusing on the continued growth of its Kirkland Signature brand while also seeking to establish new relationships with premium brands. It partnered with Apple, Columbia Sportswear, Sony, and Weber among others in the last year. With near four-decade-long experience, Costco has established an industry-leading reputation for providing good customer experience by blending the convenience of specialty departments and a wide selection of merchandise. It has become a trusted name owing to its low cost and quality merchandise. Costco has a strong position with nearly $11 billion in cash equivalents. Its international and e-commerce growth further makes it resilient for the future.
Retail is a highly competitive industry. Costco competes with global, national, and regional wholesalers and retailers on a worldwide basis. Walmart, Target, Kroger, and Amazon.com are among Costco’s major general merchandise retail competitors. It also competes with other warehouse clubs primarily Walmart’s Sam’s Club and BJ’s Wholesale Club. A large and loyal base of customers, economies of scale, diverse inventory of merchandise, and strategically located warehouses are Costco’s major competitive advantages. The company has seen the world and the retail landscape change in the last 36 years of its existence.
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|NYSE:WMT||WMT||Walmart||Consumer Defensive||Discount Stores||0.57||143.85||407.64||22.93||22.93||6.27||0.0150||0.3445||4||2.16||0.0393||7||7||Consumable - Discretionary||NO||YES||YES||NO||USA||1||1.50|
|NASDAQ:COST||COST||Costco||Consumer Defensive||Discount Stores||0.61||374.60||165.28||41.55||41.55||9.02||0.0075||0.3104||4||2.80||0.1246||10||5||Subscription||YES||YES||NO||NO||USA||1||0.75|
|NYSE:TGT||TGT||Target||Consumer Defensive||Discount Stores||0.65||160.23||80.21||23.13||23.13||6.93||0.0170||0.3925||4||2.72||0.0807||8||7||Consumable - Discretionary||YES||YES||YES||NO||USA||1||1.70|
Costco has offered a steady dividend growth to its shareholders. Strong consumer defensive business, reasonable prices and great deals, and a strong brand recall have made Costco the preferred choice of customers. Though stay-at-home orders and social distancing restrictions have decreased foot traffic to Costco’s warehouses, its e-commerce sales have greatly picked up. Given, the company’s long experience in the retail industry and extensive distribution network, it was able to quickly adapt to the changing consumer behavior and preferences. With stores now reopening, Costco should not likely see declines in its future earnings.
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.