Ask The Rational Investor: Costco Wholesale a great stock and store!
For years, Friends and Family have commented on the great prices, product quality, and selection of Costco Wholesale stores. In fact most Costco members are passionate supporters of Costco!
Costco’s low prices and loyal customers have provide investors an intriguing dynamic of growth, but also predictability of sales stability in a recession due to customers looking for better prices in a weaker economic environment.
It surprised me to learn that Costco Wholesale is the third largest global retailers with over $140 billion in sales, over 94 million members, and the 15th largest company in the Fortune 500.
The company’s vision of “Keep costs down and pass the savings on to our members” can be seen best in comparing the company’s gross margin to key competitors. For instance, in 2019 Costco’s gross margin (or profit over cost) was 11% compared to 25% for Walmart and 29% for Target.
Costco keeps their prices low by using it’s massive scale to purchase large amounts of limited inventory. Costco has about 4,000 SKUs (stock keeping units) compared to almost 30,000 found at most stores. By limiting the SKUs they increase their buying power offer lower prices to customers.
Most stores have distribution centers or a central hub where inventory for various suppliers arrives. From the distribution center inventory to shipped to individual stores. Costco has eliminated this middle layer (and extra cost) and requires their suppliers to ship directly to their stores. Again, an advantage of scale and very strong business management.
Loyal customers, low prices, and the ability to open new stores has created a very interesting growth trajectory for Costco Wholesale. With that being said, the valuation of Costco Wholesale isn’t cheap at about 32x 2020’s earnings and 34x the last twelve months of earnings compared to about 16x for the S&P 500.
Investors that are willing to pay a high multiple for Costco’s earnings appreciate the long-term growth story, limited net debt, and ability to weather an economic slowdown well. Whenever considering a new investment you should consider your individual circumstances and discuss it with your portfolio manager.
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.