Costco (COST, Financial) has turned itself into one of the biggest retailers in the U.S. on the back of its strong business model. Due to its robust business model, the company has managed to reward investors with healthy returns for many years. The company’s strong upward momentum started in mid-2009 and it managed to end every year on a positive note.
However, the retailer’s long positive streak was disrupted in 2016, as the company failed to find its way into the green. In 2016, the stock was down approximately 1%. But, the company has grown well at a time when other retailers in the industry have struggled.
In the most recent quarter, the company reported EPS of $1.17, missing the estimate by 2 cents. The company’s revenue came in at $27.47 billion, missing the consensus by $830 million. Still, that figure represents a surge of nearly 1% year over year.
Costco has a completely different story when it comes to generating profits. While many other retailers try to earn small profit on every single sale, Costco in its place sells yearly memberships at the base price of $55.
The retailer generates nearly 75% of its profit from membership fees, and it can manage to balance out its low-margin sales through its high-margin memberships. This model depends on membership numbers and it is essential for the retailer to grow its membership base, or at least preserve its current members.
The company performed well in 2016, as it continued to surge its membership base at a healthy rate. In 2016, the company recorded 90.3% renewal rates in the U.S. and Canada and 88% globally.
Nowadays, consumers are continuously moving towards online sales, but Costco is still focusing on its stores rather than its website and digital operations. The primary reason behind this is the in-store experience of the retailer that forces consumers to join the warehouse club.
Still, Costco has a website and it also sends email deals to consumers, but it has an unglamorous strategy. Despite all these, the retailer saw its total online sales increase by 8%. Although that figure looks bland, it was an inspiring sign keeping in mind the imminent prospects of the retailer.
Conclusion
Although Costco’s long streak of ending its full year in green was disrupted with the end of 2016, it still has a lot of potential to move upward in the future. The most important thing to notice is that the retailer has upheld its business and displayed solid growth, whereas several other retailers have struggled to endure in the industry mainly due to rising online competition.
Moreover, the company recently switched its credit card from American Express (AXP, Financial) to Visa (V, Financial), which looks like a great move, as the new card is prodigious in terms of better cash back rewards for consumers. All in all, rising membership base, enhancing comparable same-store sales and high renewal rates throws light on an optimistic future for the retailer.
Investors seeking to initiate a position in the stock should wait for a pullback, as the stock currently hovers around its all-time highs.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
Start a free seven-day trial of Premium Membership to GuruFocus.Ă‚
