STOCK PICK: A Membership Too Hard To Turn Down
STOCK PICK: A Membership Too Hard To Turn Down
When this company gets a new paying member, they are loyal for life.
This company was the first company ever to grow from zero to $3 billion in sales in less than six years. It was one of the world's first-ever membership warehouse clubs and has a strong reputation for taking care of its employees and keeping its customers coming back year after year. This company is none other than Costco Wholesale Corporation (NASDAQ: COST).1
Company Overview
Costco Wholesale Corporation operates hundreds of “big box” membership stores selling anything from groceries to sporting goods and even office supplies (and everything in between). It was founded by James Sinegal and Jeffrey H. Brotman in September 1983. The company opened its first location in 1976 in a converted airplane hangar in San Diego, CA.
In 1993, Costco merged with Price Club, the world’s first membership warehouse club.2 As of May 4, 2023, it has e 852 wholesale warehouses for its paying members.3 Costco’s more than 100 million members pay a fee to shop at their warehouses for “Quality items, unexpected savings, and satisfaction guaranteed.”4
Furthermore, Costco offers financing options such as store credit cards for additional rewards and discounts, they own multiple brands sold exclusively at their warehouses, and they operate as many as 636 gas stations for additional savings opportunities for members.5
Costco’s mission is “to continually provide our members with quality goods and services at the lowest possible prices.”6
Leadership
W. Craig Jelinek is Costco’s current CEO and has been a director and President for the company since February of 2010, and CEO since January 1, 2012. He also served as Chief Operating Officer of Costco from February 2010 until January 2012. He has over three decades of management experience in warehouse operations.7
Why Invest In Costco?
Some of the biggest reasons that Costco signals a great investment opportunity include having spectacular financial health, having some of the world's most loyal customers and employees, it operates in an essential industry, having great products, lots of growth opportunities and they have a diversified list of products and services.
Strong Financials
Costco is currently valued at about $215 billion as of this writing, generating over $234 billion in revenue over the last 12 months. Some numbers on Costco’s financials that stick out to me are:
Return on Equity: 28.43%
Quarterly Earnings Growth (yoy): 12.90%
Total Cash: $13.7 billion
Total Debt: $9.14 billion
Levered Free Cash Flow: $4.05 billion
In short, their ROE is way above average. This is essentially the total return on the money investors give them. Their quarterly earnings growth is healthy at 12.9% year over year. They have more cash on hand than they do debt, and they have $4 billion left over after expenses (levered free cash flow). (Financial numbers are as of the time of this writing)
Loyal Members
Costco has some of the most loyal customers I’ve ever seen any business have. As of today, Costco’s membership renewal rate sits at 92%! When members sign up for a Costco membership, they stay for a long time. Furthermore, their membership fees increased by 9% in 2021.8
Happy Employees
Everyone knows that Costco doesn’t play games when it comes to taking care of its employees. While many companies today are increasing their minimum wage to $15 per hour, Costco has been paying its employees an average of around $24 per hour according to its CEO Craig Jelinek.9 What's more, is that over 60% of Costco's employees have been with the company for at least 5 years, and over one-third of it's employees have been there for 10 years or more. Much like its loyal members, Costco’s employees come and they stay.10
Essential Business
Essential businesses include companies whose business operations are necessary for an economy to maintain and thrive. The nice thing about investing in a business that sells goods and services that people need to survive is that they pose great investments in all market conditions. Costco falls into this category of essential businesses. Combine that with its strong financial health, loyal customers, and lifelong employees, and you begin to see how great of an opportunity Costco is as a long-term investment.
Powerful Brand Name
Not only am I referring to the worldwide brand, Costco, but I’m also referring to its in-house brands - namely Kirkland Signature. Much like Amazon has created its own brands for top-selling products (Amazon Basics), Costco’s brand Kirkland Signature has built a reputation of not only cheaper products, but better products as well. If Costco members have the choice between a brand name house cleaning product and Kirkland Signature that’s the exact same, they’re likely to go with Kirkland Signature because it’s just as good of a product (if not better) at a lower price.
Diversified Product Offerings
Costco’s range of products is many - spanning over 4,000 SKUs in its warehouses combined with multiple service offerings. Some of the more popular products and services Costco offers include:
Delivery - Get all your household supplies and essentials delivered to your doorstep
Gas - Member-only gas stations with quality gas at lower prices
Pharmacy - get new prescriptions and refills from any Costco warehouse or delivered to your door
Grocery - Shop for groceries in bulk or have them delivered same-day by Instacart
Costco Auto Program - Save more money on new or pre-owned vehicles
Rental Cars - Costco’s “Low Price Finder” helps you find and save money on rental cars
Pets - A one-stop shop for all your pets needs including food, medications, and toys
Costco Visa Cards by Citi - You can get even more rewards and better deals with a Costco Anywhere Visa Card provided by Citi.
Having such a diversified range of products can be a sign of stability when it comes to investing. The more streams of income a company has, the less likely they are to see a major downtrend should one offering take a nosedive.
Large Growth Potential
Costco is currently a $215 billion company and operates in 8 different countries. To put that into perspective, Walmart is currently a $400 billion company, The Home Depot is a $300 billion company, and Proctor & Gamble is a $349 billion company and growing. Without taking into account the potential industries Costco can expand into, there is plenty of market share available for Costco to grow.
Competitors to Costco
Some of Costco's biggest competitors include Walmart (who owns Sams Club) (NYSE: WMT) and Target (NYSE: TGT). Both Walmart and Target have their own niche market with Walmart being known for having the lowest-cost products and Target being known for their unique products and quality service. Costco, however, has carved out a market that caters to wealthier families and building an exclusive community.
My Opinion
Aside from the financials of a company, some of the biggest signs of a successful investment lie within the direct responses of a company’s customers, its employees, the reviews of its product or service, along with your own personal experience interacting with the company. If I were to rate each of those four areas on a scale of one to ten, I’d rate them all at an eleven. Nuff said...I’m holding onto Costco for a long time.