Is Costco a Recession-Proof Stock?

Two types of retailers have proven resistant to the so-called retail apocalypse: chains that offer good value, and those with a treasure hunt aspect. Costco (NASDAQ: COST) has both of those elements, along with a number of other things that make the stock a smart bet if you believe a recession is inevitable.

The warehouse club has essentially been a model of consistency, even as digital retailers and brick-and-mortar chains that have invested heavily in the omnichannel model have brought more sales online. Costco has steadily added members every quarter, kept its renewal rate around 90%, and slowly added new warehouse locations. It may not be a sexy model, but it's one that might make the company even more successful if consumers tighten up their personal purse strings.

The exterior of a Costco.

Costco offers discounts and a treasure-hunting aspect. Image source: Costco.

Why might Costco do better in a recession?

The warehouse chain makes the vast majority of its profit from selling memberships. It then keeps those members by offering them very low prices with almost no markup and an ever-changing selection of merchandise, alongside some staples.

Some people likely visit their local warehouse with a set shopping list in mind, even if they might veer off that list if exposed to the right merchandise. Others visit the chain simply to see what's being sold. In many ways, a Costco visit can be as much about entertainment as it is shopping -- you can walk around the store, check out what's being sold, try some free samples, and sometimes leave without buying anything.

If the samples aren't enough for you, the food court has a hot dog and soda combo for $1.50, very cheap pizza, snacks, and a few other inexpensive options. A family of four can visit a warehouse club with a $20 bill and leave well-fed with change.

It's a recipe that has worked well even as more consumers do their shopping online, and it's one that might be even more attractive in a weaker economy. Even people on a tight budget need to eat. Costco can feed them, fill their pantries at a low price, and provide some entertainment (even if you don't buy a stand-up paddleboard or new pair of snowshoes).

Steady growth should continue

Costco closed its fourth quarter with a renewal rate of 90.9% in the U.S. and Canada, where the vast majority of its stores are. Its international renewal rate came in at 88.4%. Both were up quarter over quarter, and both are all-time highs.

Membership also increased quarter over quarter. It finished Q4 with 98.5 million members, up from 97.2 million at the close of Q3. The company also opened 10 new locations in Q4, including its first in China.

Costco also added to its Executive membership base. Those are members who pay $120, twice the cost of a basic membership, but get 2% cashback on qualifying purchases from the warehouse club and its website up to $1,000. CFO Richard Galanti detailed the growth in that membership base during the company's Q4 earnings call.

"At fourth quarter end, paid executive memberships totaled 20.8 million, which was an increase during the quarter of 362,000 or 23,000 a week," he said. 

Executive members have added incentive to visit because they can earn back the cost of joining if they shop enough. That too may tie them closer to the chain if a recession hits.

Costco has a business model that's appealing no matter what the economic conditions are. People may splurge and buy silly things in better times, but cheap groceries and household goods remain appealing in a weaker economy. In both cases, consumers keep joining the warehouse club and renewing their memberships.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale and recommends the following options: long January 2020 $115 calls on Costco Wholesale and short January 2020 $180 calls on Costco Wholesale. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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