Buying in bulk remains a great value proposition for shoppers,
but it can also be a great way to invest.
#-ad_banner-#There's only one pure play on the U.S. warehouse
retail market. Even better, this stock is one of the best
investments in retail thanks to its wide moat. Sadly, investors
won't get a discount for buying the stock in bulk -- but they can
still make money over the long term by buying the stock in
remains the only pure play on the U.S. warehouse retail market.
Its most formidable competitor, Sam's Club, is owned by
, and another major peer, BJ's Warehouse, was taken private in
To shop at the major warehouse retailers, customers must buy a
membership, which then allows them to save money by buying a wide
variety of products in bulk. Costco uses its membership fees to
offset the cost of the goods it sells, keeping its prices even
lower for shoppers.
Costco often gets unfairly grouped with many of the discount
and variety retailers. These include the likes of Wal-Mart and
, as well as the various dollar stores. However, many of these
other retailers lack Costco's economic moat -- its membership
Between its 2009 and 2013 fiscal years, Costco saw its bases
of paying members and total members grow 27%, to 39 million and
71.2 million, respectively. Last year, Costco's member renewal
rates were 90% in the U.S. and Canada and 86% worldwide.
Thanks to the membership structure, shoppers are incentivized
to keep coming back to the warehouse since they've already paid
the membership fee. Costco also has a strong presence with
business customers, which make up about a third of its total
This moat and Costco's customer loyalty has helped the company
remain resilient regardless of the economic backdrop. In eight of
the past nine fiscal years, Costco has posted year-over-year
gains in revenue, including a 5% gain last year.
||Flickr/Picture Des Moines
Between its 2009 and 2013 fiscal years, Costco
saw its bases of paying members and total members grow
27%, to 39 million and 71.2 million,
While the recent bout of cold weather across the U.S. has put
a strain on many retailers, Costco has continued its resiliency.
Sales were up 6% year over year in January, and comparable-store
sales were up 4%, beating consensus estimates of 3.3% growth.
With a number of stores concentrated in the California area,
there's still room for Costco to expand across the U.S. The
company opened 26 locations last year and is looking to open
another 30 in 2014.
The U.S. accounts for around 70% of revenue, but I expect
Costco to continue expanding its presence in international
markets. Costco is also expanding its e-commerce platform to
better compete in North America and the U.K., with e-commerce
sales up 24% year-over-year during its most recent quarter.
Costco trades in line with its historical average
price-to-earnings (P/E) multiple, but the case can be made that
we might see some slight multiple expansion going forward. This
comes as the company continues to set new highs when it comes to
operational performance. Both its operating margin and return on
invested capital are near decade highs.
Costco's P/E is over 50% above the industry average, but
Costco boasts a return on investment (ROI) of better than 13%,
which is above Wal-Mart's 11.7% and Target's 7.3%. Costco's
recurring revenue stream of membership fees also helps justify
its premium valuation when compared with the other major
Over the past five years, COST is up 170%, compared with the
S&P 500 Index's 125% gain. What's more, Costco has
outperformed the market over this time with significantly less
volatility. Its five-year annualized beta is roughly 0.65,
meaning it's about 65% as volatile as the broader market.
However, over the past six months, Costco has underperformed
the S&P 500 by 10 percentage points. The market appears to be
presenting investors with a compelling buying opportunity.
Also, don't overlook Costco's dividend, currently yielding
1.1%. Since 2004, the company has increased its dividend payout
every year and in 2012, it paid a $7 special dividend to
Risks to Consider:
While the bulk products business is a bit different than
conventional products, Amazon could well look to enter the bulk
products market. That could potentially steal sales from Costco.
The other angle is that Wal-Mart and other major department
retailers could get more aggressive with their pricing and try to
undercut Costco's prices, ultimately forcing Costco to lower
prices, potentially putting pressure on margins.
Action to take -->
Buy Costco for the long term. You can't take the conventional
valuation approach with Costco. It's more of a growth story with
a very loyal customer base. The over 70 million members provide
Costco with a strong moat and recurring revenue stream.
Management has proved that it can outperform the broader market
and investors should look for this trend to continue.