Costco Wholesale Corporation (COST, Financial), together with its subsidiaries, operates membership warehouses, offering a range of branded and private-label products across diverse merchandise categories like dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, garden and patio, and office supplies; meat, bakery, deli and produce; and apparel, small appliances and home furnishings.
Costco currently operates 673 warehouses, including 474 in the United States and Puerto Rico, 89 in Canada, 35 in Mexico, 26 in the United Kingdom, 20 in Japan, 11 in Korea, 10 in Taiwan, seven in Australia and one in Spain.
During the second quarter of fiscal 2015, the warehouse retailer reported earnings of $1.35 per share representing a 29% year-over-year growth. This was on the back of 4.3% year-over-year revenue growth. However, during the last three months, the stock has registered a decline of around 4%, currently trading at lower than 200-day simple moving average.
Repurchase authorization
Costco announced last month that its Board of Directors have authorized a $4 billion share buyback which replaces the expiring buyback which was authorized in 2011. Does this mean that Costco shareholders are going to be getting loads of cash soon? Well, I don’t think so and here’s why.
The expiring $4 billion repurchase program had begun in April 2011, had $2.5 billion unused. This means that during the course of last four years, Costco had only spent $1.5 billion on share buybacks. So, authorization does not necessarily mean buyback in reality. The idea of share buyback is to boost the value of shares by reducing the count, but after 2009, the share count is around the 440 million mark.
Special dividends
However, having unutilized funds in share buyback program doesn’t mean that Costco is not shareholder friendly. A look at the total return during the last five years shows that Costco has been a profitable stock to own, as it has returned billions of dollars to investors. The investors were rewarded with a meaty $7 special dividend in 2012 and this was followed up with a $5 special dividend earlier this year, returning close to $2.2 billion to investors.
Whereas the wholesale retailer had $2.5 billion unutilized in its expiring share buyback authorization, it did return $2.2 billion through special dividends, which will be separate from the quarterly payment. In fact, having authorization is a good thing to have as a cover for any huge sell side pressure, wherein Costco can quickly buyback shares.
Costco is growing at rapid clip
Costco is growing faster than its rivals. For the first half of fiscal 2015, the warehouse retailer registered 5% year-over-year growth in comps. The only retailer that comes close is Kroger (KR, Financial) which reported 6% comps growth versus 4% of Target (TGT, Financial) and miniscule 2% of Wal-Mart’s (WMT, Financial) Sam’s Club.
A happy and loyal customer base is the secret to Costco’s growth. The retailer dominates many customer satisfaction surveys and this is reflected in customer renewal rates being 91% – 1% higher than the prior year.
Americans are becoming increasingly health conscious and, as a result, demand for organic and natural food has shot up by leaps and bounds. Like most of its peers, Costco too have jumped on the bandwagon to make the most of the growing opportunity in the organic and natural food segment. The warehouse retailer recently partnered with Amira Nature Foods (ANFI, Financial), to sell the latter’s organic products at its stores in Arizona, Nevada, California, Colorado, New Mexico and Utah. Selling organic and natural food items will also mean a higher margin.
Final words
The stock trades at a trailing P/E of 28.55 and forward P/E of 25.50, signifying growth going forward. The high evaluation should be something to worry about as even during the Great Recession it was around 20. Analysts expect a compound annual growth rate of over 10% for the next five years. The membership renewal rate is very healthy, and total payouts over long-term have been very good. Costco is a great stock to hold for the long-term, so buying on dip is a great idea. Buy and hold for long-term gains.
