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This Might Be One of the Best Investments of Your Portfolio

June 26, 2014 | About:
Suravi Thacker

Suravi Thacker

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People are very sensitive to price and tend to save every penny earned. Therefore, companies which provide such an opportunity are largely looked for. For instance, discount stores are highly appreciated since they provide huge discounts on basic items, enabling customers to save on their daily expenses. Similarly, there are companies such as Costco Wholesale Corporation (COST) which offer lowest prices possible on bulk purchases and charge an annual membership fee in turn.

Costco Wholesale Corporation reported its third quarter numbers recently which showed the growing importance of the company. It managed to meet the analysts’ expectations, sending its share price higher.

A snapshot of what happened

Revenue grew 8% to $8.78 billion as compared to last year’s quarter. This growth was driven by same store sales growth of 6%. The company seemed to be unaffected by severe weather conditions and snow storms which hampered sales at most of the retailer’s stores. Moreover, as spring season came in, people started going out and shop.

In fact, both domestic and international sales surged during the quarter helped by growth in same store sales. The metric grew 6% in the U.S. and 4% in the International market. Revenue from international market was affected by unfavorable currency movements. Excluding the effects, same store sales growth was 7%.

Costco’s model of annual membership attracts affluent customers who are willing to pay for the membership in turn of lower prices for every product. The basic membership fee for any customer is $55. Therefore, not all customers can buy the membership. However, this comes as a clear profit for the company every year.

However, higher employee salaries have been a matter of concern, keeping the bottom line low. Earnings for the quarter increased slightly to $1.07 per share as compared to $1.04 per share last year.

As against others

Costco has been a great performer as compared to its peer Wal-Mart (WMT), which offers similar products through the Sam’s Club channel. Wal-Mart’s revenue (on a TTM basis) has increased 18.7% in the last five years. On the other hand, Costco’s revenue jumped 51% during the same period. This reflects higher demand for Costco, which has been driving growth.

Nonetheless, Costco faces stiff competition from online retailers such as Amazon (AMZN) which provide products at the click of a mouse. The goods are delivered at the doorstep and cost less since such companies save on store operating costs. In fact, because of Amazon’s growing stature even other traditional players such as Wal-Mart has moved into the online business. They too operate websites to place online orders which can be picked up from stores as well as can be delivered.

My takeaway

Costco has been a great performer with a bright future because of its business model which attracts premium customers. However, the absence in the e-commerce market can be a hurdle for the company. On the other hand, despite an increase in its membership fee people continued to buy its products. Therefore, it highlights the importance of its lower priced products. Also, it raised its dividend to $0.35 per share from $0.31 per share. Hence, this retailer can prove to be a rewarding option.


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