The retail market is rapidly shifting away from traditional brick-and-mortar stores to online marketplaces, which has significantly affected several brands. Many retailers have struggled to cope with the paradigm shift in consumer behavior. Not all have suffered, however. One of America’s top stores, Costco Wholesale Corp. (COST, Financial), has adapted impressively.
While some notable brands like Macy’s (M, Financial) and J.C. Penney (JCP, Financial) have experienced a significant decline in market value over the last decade, Costco has maintained an upward trend in its stock price since the global financial crisis. The company has quadrupled its market value, rallying from around $50 per share in 2009 to the current price of about $196.
As illustrated in the chart below, however, it has endured some significant dips and rebounds. Costco’s price-earnings ratio, on the other hand, has doubled over the same period, albeit with choppier movements as it partially mirrors its earnings per share growth.
At a price-earnings ratio of about 29 times, Costco appears to be relatively expensive compared to Macy’s, whose price-earnings ratio stands at just under 10 times, but is more on par with Walmart Inc. (WMT, Financial), which has a price-earnings ratio of about 27 times. This explains why, even after quadrupling in value over the past nine years, some analysts still think the retail giant has room to run.
While e-commerce companies like Amazon.com Inc. (AMZN, Financial) and eBay Inc. (EBAY, Financial) have threatened to take over the retail market by luring customers to their online marketplaces, Costco’s revenue and earnings have continued to grow over the years. The company’s revenues have nearly doubled over the last nine years, from $71 billion in 2009 to $136 billion.
Its diluted earnings per share have more than doubled, rallying from $2.47 to nearly $6.70.
Comparing the two performance measures, Costco’s diluted earnings per share have outgrown its earnings over the nine-year period, which suggests the company has also improved its cost management practices. For instance, its gross profit has more than doubled over that period. This is partly what has enabled it to keep up with the changes in the retail market.
While the traditional retail market has been characterized by store closures and consolidations, Costco has managed to increase its outlets over the last couple of years. Currently, Costco is on course to open more than 20 new stores during the year after announcing 15 more openings on the most recent earnings call. Last year, the company had 23 net openings, which implies continued growth amid an environment where most brands are closing stores.
The company reported its fiscal second-quarter earnings last month. Its revenue of $33 billion beat analyst estimates by $280 million, while earnings missed by 4 cents per share. Its top line was boosted by another impressive return from its online stores, which have benefited from the company’s diverse footprint across the world. Costco currently has e-commerce operations in the U.S., Canada, Mexico, Korea, Taiwan and the U.K. Its e-commerce sales grew 29% year over year to $1.5 billion in the most recent quarter.Â
One of Costco’s strengths has been its ability to harness synergies by integrating its physical stores with its online marketplace. The company enjoys a strong presence in North America and has used this strategic advantage to improve customer experience online.
It has effectively implemented a two-day dry grocery delivery and same-day fresh grocery food cart process, which customers have embraced.
As Costco continues to expand its physical and digital presence, it will put itself in a better position to endure the threat posed by Amazon and eBay.
Disclosure: I have no positions in any stocks mentioned in this article.
