Costco’s (COST, Financial) stock price has declined by more than 15% since hitting its 52-week high in July this year. Every time Amazon (AMZN, Financial) announces a deal, retail stocks get hit, and Costco has been at the receiving end twice this year.
First, it was the Sears (SHLD, Financial) deal with Amazon in June, and now it's Amazon’s decision to cut prices at Whole Foods (WFM, Financial). Retail stocks remain under tremendous pressure due to competitive forces and the expectation that Amazon will eat up most of the retail market share, leaving big box retailers without any room to maneuver.
There are several reasons why that argument is flawed, and there are many reasons why you should buy into Costco by taking advantage of the current drop – as well as future drops as and when they happen.
Reason 1: Amazon is not the only company that’s growing
Believe it or not, Amazon is not the only retail company that is growing in the North American market. Walmart (WMT, Financial), the world’s largest retailer with nearly $500 billion in global revenues – and more than $200 billion of that coming from the U.S. alone – has been growing its comps (comparable store sales) for the last three years. If Amazon is the only company everyone will buy from, why did more people choose to buy at Walmart this year compared to last year?
Back to Costco, the wholesaler’s sales growth has been impressive. Even as the e-commerce segment kept notching up double-digit year-over-year growth for the last 10 years, Costco’s sales kept increasing as if nothing was happening around it. If people didn’t find value differentiation at Costco, they would not have gone there when there were so many other options available, especially online.
Reason 2: In retail, price is still king, and Costco is the king’s favorite
Shipping is a persistent headache for e-commerce companies. The more customers they have, the higher their shipping costs. In a way, it is more of a fixed cost than a variable one; no matter what ecommerce companies do, they need to either get their customers to pay for shipping or pay for it themselves. Either it will increase the cost of the product or it will cut into the operating margins of the company. This is one place where e-commerce companies will never be able to beat big box stores, and this is one place no company will be able to match Costco because it operates a warehouse model.
"Recently a study from BMO Capital Markets tried to get to the heart of another shopper debate: Is Amazon or Costco a cheaper place to shop? The results were fairly surprising: After comparing prices for 54 common items at Amazon, Costco and Costco.com, researchers found that physical Costco stores generally had the lowest prices, followed by the retailer's own website and then Amazon. Overall, prices were 17% cheaper at Costco.com than they were at Amazon, and prices for national brand items were 19% cheaper at Costco.com compared to Amazon." – Time
Yes, you order in bulk, but that’s how things have always been, and there are millions of Costco customers who keep renewing their memberships every year because they are ready to keep buying things in bulk so they can pay less.
Amazon will never be able to match Costco’s prices. Maybe it can on a few products, but when you take a shopping basket and compare, the difference will be stark. Size and shipping are Costco’s friends due to its business model while they are Amazon’s enemies due to its e-commerce model. This is one advantage that Costco has, and it will serve the company well for many more years as it has done in the last 10.
Reason 3: Costco is neither a small nor weak retailer that can be hung out to dry
Let there be no doubt that Amazon is growing, but let's also understand that, even now, there are people buying from Amazon as well as other retailers. I do that myself, and I know a lot of people who do the same. Nobody likes to just keep shopping at one place, not knowing what the products or prices are at other retailers. Competition and variety are at the core of the retail market, and these two components have increased manifold in the last 10 years and will continue to do so in the foreseeable future.
Yes, smaller and weaker retailers might die or consolidate, but Costco is just not one of those. At the end of the third quarter of the current fiscal, Costco had nearly $6 billion in cash and investments with long-term debt of $2.8 billion. Management could have easily accumulated debt and bought back shares, but it has never done that in its history. This is a financially well-managed company, and that only makes the decision to buy Costco even safer than it actually looks.
If there is one company that can survive without a great online presence, that will be Costco, so buy it as the stock keeps getting hit with Amazon news that cripples most other retailers.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
