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Costco Wholesale Research Report 1.20.2024

Ticker: COST
Sector: Consumer Defensive
Industry: Discount Store
Headquartered: Washington, USA
Moat: Wide – Intangible Asset- Brand, Management, Process Power

Action at date of this post

Accumulate as of 1.20.2024
This is technically a buy opinion. Accumulate means if you are an investor that buys periodically then keep buying Costco. If you do not own it but are looking to buy this is an indication to open a position of no more than 25% of your intended, total position.

Costco Corporate Overview

Costco Wholesale Corporation is a multinational retail giant known for its membership-based warehouse club model. As of 12/31/2023 the company operated 870 stores in 14 countries. Founded in 1983 in Seattle, Washington, Costco has grown to become one of the largest and most successful retailers in the world. The company operates on a membership-only basis, offering customers access to a wide range of products, including groceries, electronics, appliances, apparel, and more, at discounted prices. Costco’s unique business model focuses on high-volume sales and low-profit margins, relying on membership fees for a significant portion of its revenue. With a commitment to providing value to its members, Costco emphasizes quality products, bulk purchasing, and a no-frills shopping experience.

Costco’s success is attributed to its efficient supply chain, which allows it to keep costs low and pass on savings to customers. The company’s private-label brand, Kirkland Signature, has also played a key role in driving customer loyalty. Costco’s expansion beyond the United States into international markets has further contributed to its growth, with a presence in countries around the globe. Known for its employee-friendly policies, Costco has gained a positive reputation for offering competitive wages and benefits, contributing to a satisfied and dedicated workforce.

Costco Segment Analysis

Costco operates in what they call two categories: Core Merchandise and Warehouse Ancillary. Core Merchandise is foods, sundries, and non-foods (appliances, electronics, etc…). Warehouse Ancillary is gasoline, pharmacy, food court, tire installation, etc…). Images from Costco latest presentation.

Costco Wide Moat Source

The primary source of Costcos moat is intangible assets in the form of brand strength and consumer loyalty. As well, the company’s process power of maintaining a small number of SKUs and an efficient inventory system helps add to the moat. Economies of scale are another contributor as the Kirkland brand allows the company to get favorable pricing on producing well loved products.

Costco Growth Outlook

Costco has over 60% market share in the warehouse club space per Euromonitor. With this kind of unmatched scale and while staying true to the no-frills, low-cost nature of the business, there is no reason to think the company will not maintain its competitive advantage. The company is likely reaching full saturation of store count in the US and Canada. Alternatively, the growth overseas is in early stages and garnering a significant level of customer adoration. 

The company maintains an impressive membership renewal rate that helps support its ability to offer high-quality, low-cost goods. The membership fees account for +/- 50% of the firm’s operating income. 

The company’s inventory and logistics plan is to maintain a relatively small number of items (SKUs). Costco’s SKU count is about 4,000 which is much smaller than the SKU count at other retailers who have over 100,000. On the inventory side of things, Costco keeps most inventory at the point of sale warehouses. With a smattering of distribution centers around the US, the company can quickly move inventory around to fulfill demand. 

The private label Kirkland brand comprises about 25% of net sales. This allows the company to maintain significant supplier relationships. In turn, this gives the company great insight into consumer data, cost structure and product lines. 

The flywheel of low prices and strong consumer loyalty is not in jeopardy and gives the notion that the company will continue its strong sales for the foreseeable future.

Costco By The Numbers

Consistent positive free cash flow and ROIC yields a company that has no trouble achieving a positive return above the cost of capital. The consistency of ROIC at about 16% per year is impressive for a low margin retailer. As well, while not a huge number the consistency of gross profit margin at about 12% every year, points to a company with solid control of its operations. Debt is reasonable if not low. CAPEX spending is higher than both dividend and stock repurchases combined. The CAPEX spending points to a company that  is not sitting idly by.

This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

At the time of writing, the author holds a position in Costco.

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