Pat McKeough responds to many requests from members of his Inner Circle for specific investment advice, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.

Last week we had a question from an Inner Circle member about one of North America’s leading big-box retailers. Costco has built a growing business on the membership fees it charges and its policy of buying directly from manufacturers, which helps keep prices low. Pat balances the company’s rising revenues, international expansion plans and high membership renewal rate against the intensely competitive market in which it operates.

Q: Pat: What is your advice on Costco? Is it a buy right now? Thank you.

A: Costco Wholesale Corp. (symbol COST on Nasdaq; www.costco.com) owns and operates warehouse-sized stores that sell a wide variety of consumer goods.

The company charges its customers an annual membership fee, usually $55 a year, to shop in its stores. Costco has 663 outlets, including 468 in the U.S., 88 in Canada, 33 in Mexico, 26 in the U.K., 20 in Japan, 11 in South Korea, 10 in Taiwan, six in Australia and one in Spain. It also sells products online in the U.S., Canada, the U.K. and Mexico.

The company plans to open 25 to 30 more outlets in the next year or two. About half will be in international markets.

Costco buys most of its inventory directly from manufacturers, which lets it sell for less than traditional retailers. Food accounts for roughly half of its sales.

Holding the line on prices helps Costco keep member renewal rate high

In its fiscal 2014 third quarter, which ended May 11, 2014, Costco’s revenue rose 7.1%, to $25.8 billion from $24.1 billion a year earlier. Same-store sales gained 4%, as higher customer traffic offset the negative impact of foreign currency rates and lower gasoline prices. Costco operates discount gas stations at 65% of its outlets, and nearly 30% its customers buy gas and shop on the same trip to the store.

Earnings per share rose 2.9%, to $1.07 from $1.04.

Costco’s long-term debt of $5.0 billion is a low 9% of its market cap. It holds cash of $7.3 billion, or $16.59 a share.

The company faces strong competition from discount stores like Wal-Mart and Target, as well as other warehouse-store chains, such as Sam’s Club (which is owned by Wal-Mart). That means the company is unlikely to raise its prices as long as its purchasing costs stay low. This hurts Costco’s profit margins but helps it hang on to customers. In the latest quarter, its member renewal rate was 91% in the U.S. and Canada, and 87% worldwide.

Costco has just announced that it will stop accepting American Express cards in Canada after its agreement with Amex expires on December 31, 2014. Instead, it will replace these cards with the Capital One Platinum MasterCard. Costco also plans to accept other MasterCard credit cards at its Canadian locations.

The company probably earned $4.65 a share in the fiscal year ended August 31, 2014. The stock trades at 27.2 times that estimate. The $1.42 dividend yields 1.1%.

We view Costco as a hold.

Monday we report on Domtar’s attempts to diversify away from the cyclical pulp and paper market.