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Costco - A Safe Harbor in the Retail Industry

May 02, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

1 followers

There is no doubt about the fact that Internet has changed the face of this century to such an extent that people have gone online for most of things like shopping, medical help and even raising venture capital for start-ups. While this is definitely a positive step in terms of technology advancement, this shift to the online world has done reasonable damage to the offline retail industry comprising of huge retail chains like Walmart (WMT), Target Corporation (TGT) and Costco (COST). However, Costco has been above the rest in terms of delivering robust results essentially because of its sustainable membership model.

Decent Numbers for the Second Quarter

Costco reported its second quarter earnings in the month of March and I would like to briefly summarize the numbers before going ahead. Costco’s earnings for quarter two slid to $1.05 per share from $1.24 per share, a year ago. Even after adjusting for a $53 million tax benefit that accrued to the company last year, current earnings per share are still lower than the prior-year period. One of the reasons for the fall in earnings was weak sales in the four-week window from Thanksgiving to Christmas, due to a snowy weather.

A Robust Membership Model

Over the last few years, Costco has delivered better performance than its peers because of its effective membership model. For instance, Costco’s sales have grown approximately 47% over last five years whereas peers like Wal-Mart and Target Corp have grown revenues less than 20% in the same time. One of the reasons for this sturdy performance has been a sustainable membership model that has been developed by Costco.

For the second quarter, new membership signups companywide were up 13% year over year while the overall membership fees were up by 4% year over year to $550 million. Additionally, the paid executive memberships stood north of 14 million in the quarter, an increase of 0.2 million since the end of the first quarter, and it is significant to note that this type of membership represents approximately two-thirds of Costco’s total sales.

There are a good number of key success factors for a massive retail chain like supply chain management, infrastructure, efficiency of aisle keepers, etc. However, one major factor that decides the fortune of any retail store is customer satisfaction and based on data from University of Michigan’s American Consumer Satisfaction Index (ACSI), Costco is No. 1 among all U.S. retailers in terms of customer satisfaction. A combination of high-quality products, reasonable prices and efficient service keep Costco’s members coming again and again. As per data, the membership renewal rates for Costco have stayed to the right of 85% besides a growth of 13% in new signups as mentioned above.

Expansion Plans in Store

One of the better things about Costco is its expansion strategy. It is worthwhile to note that the company is not an aggressive player when it comes to expansion. As for the year 2014, the company has planned 29 new stores of which 17 will be in the U.S and 3 in Canada. This is in alignment with company’s style of expanding across different geographies as it wants to ensure optimum quality across all its stores.

While the company is making good progress in geographical expansion, it has also stepped up its efforts in online retail World. Besides revamping the website for better navigation and ease, Costco has added some mobile apps as well. Also, the company has planned its shipping in a way to ensure quick delivery of ordered products by using additional depots.

Final Words

It is beyond doubt that Costco’s strength lies in providing an ultimate shopping experience to members at low prices, which is unique to the company. Also, the retail giant is making strides in the organic foods business, a growing segment of the grocery industry. As Richard Galanti pointed out in the earnings call: The organic business is big and growing fast and will provide a robust revenue stream for the future.

To sum it up, Costco is an ideal investment candidate for the following reasons:

  1. For quarter two, Costco’s comparable store sales grew by around 3% in spite of a weak economy and unfavorable business conditions. The primary reason for this growth is the huge discount, i.e. around 55% that members can avail of by purchasing from warehouse clubs. As a result, comparable sales have shown decent growth.
  2. The growth of online retail sites has already damaged the growth prospects of brick and mortar retail chains. In such adversity, Costco represents a fundamentally strong option for investment because of above-mentioned strengths.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

Rating: 3.0/5 (1 vote)

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Comments

Dr. Paul Price
Dr. Paul Price premium member - 6 months ago

What is Costco worth? You never made any attempt to put a 'fair value' or price target on it.

Without that information how can you know if it is a buy, hold or sell?

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