A Member of Pat McKeough’s Inner Circle recently asked for his advice on a well-known wholesaling company that offers its retail members bargain prices.
Pat likes the firm’s consistent revenue growth over the years as well as its high membership retention rates. It also has a strong balance sheet with low debt and lots of cash. Pat notes the company is facing lots of competition from well-funded competitors, but feels the stock’s biggest drawback is its high valuation.
Costco Wholesale Corp. (Symbol COST on Nasdaq; www.costco.com) owns and operates warehouse-sized stores that sell a wide variety of consumer goods and services.
The company charges its customers an annual membership fee to shop at its locations. It currently has more than 860 outlets. There are 591 in the U.S. and Puerto Rico, 107 in Canada, 40 in Mexico, 29 in the U.K., 33 in Japan, 18 in South Korea, 14 in Taiwan, 15 in Australia, five in China, four in Spain, two in France, and one each in Iceland, New Zealand and Sweden. It also sells products online in the U.S., Canada, the U.K., Mexico, South Korea, Taiwan, Japan and Australia.
[ofie_ad]
Since 2018, Costco has opened 99 new stores—and expanded its e-commerce channels. The company’s revenue has increased 60.3%, from $141.6 billion in 2018 to $227.0 billion in 2022. Earnings rose 86.5%, from $3.1 billion, or $7.09 a share, in 2018 to $5.8 billion, or $13.14 a share, in 2022.
In the quarter ended May 12, 2024, Costco’s revenue rose 9.1%, to $57.4.9 billion from $52.6 billion a year earlier. Comparable same-store sales, excluding fuel and foreign-exchange impacts, rose 6.5% across the entire company. Earnings in the quarter jumped 28.9%, to $1.68 billion, or $3.79 a share, from $1.3 billion, or $2.94 per share.
Long-term debt was $5.8 billion against a huge cash balance of $10.4 billion.
Meanwhile, membership retention rates in North America hit a record high of 92.7% in the quarter.
Inner Circle: New services keep attracting more customers
Costco continues to add new services to boost revenue and profits. For example, it recently partnered with online platform Sesame to provide members with special discount pricing on health services. Sesame is a direct-to-consumer health-care marketplace focused on connecting medical providers nationwide with consumers.
Those discounted health services include virtual primary care visits for $29, health checkups (a standard lab panel and a virtual follow-up consultation with a provider) for just $72, and online mental health visits for $79.
New York-based Sesame’s platform doesn’t accept health insurance because it primarily caters to uninsured Americans and those with high-deductible plans who prefer to pay cash for their health care. Sesame says its model helps keep prices of services low for its users.
Another new Costco product—one ounce gold bars—has attracted a lot of media attention. Customers are limited to two bars per member, and the company says they sell out within a few hours of being posted to its website.
There are two options for one-ounce bars of 24-karat gold: one is from South Africa’s Rand Refinery and sells for $1,949.99; the other, from Swiss supplier PAMP Suisse, sells for $1,979.99. The gold is shipped to buyers and comes with a serial number and proof of authenticity. The purchase is also eligible for the 2% cash back that comes with a Costco Executive Member card.
The company has not been significantly affected by the rise of retail theft and shoplifting in the U.S. That’s because it requires shoppers to have paid memberships and it tightly monitors store entrances and exits. The company also sells bulkier items, maintains relatively high staffing ratios, and actively assists in self-checkout, among other things.
Going forward, Costco continues to face strong competition from discount stores, particularly Walmart and Target, as well as other warehouse/membership store chains. They include Walmart-owned Sam’s Club. Amazon, which bought Whole Foods for $13.7 billion in June 2017, also continues to challenge bricks-and-mortar retailers like Costco.
Still, the retailer’s loyal customer base and its bulk-buying niche are huge advantages.
Investors should note, however, that the stock trades at a high 47.9 times the earnings that Costco is forecast to earn in 2024. The stock yields just 0.6%.
Recommendation in Pat’s Inner Circle: Costco Wholesale Corp. is a hold.
