How Costco crushes its competitors
The secret lies in its membership fees.
The secret to Costco's success is simple: It profits from membership fees and not on the goods it sells.
"They sell fuel at a loss and probably sell food at cost," Morningstar analyst Michael Keara says in an interview with MSN. One of the chain's many fans, he estimates that Costco's markup is half of its big-box competitors.
This gives it a huge advantage over rivals such as Wal-Mart (WMT), Target (TGT) and grocery chains because Costco doesn't need to raise prices to improve profits. It just needs to attract more members, which is something it seems not to have a problem doing.
Membership revenue surged 15% in the most recent quarter as Costco benefited from a free increase. It sold lots of other stuff as well. Excluding gasoline sales, Costco's same-store sales gained 5%. This key metric of sales at stores open for at least a year beat the performance of Wal-Mart's U.S. locations and Target stores. They eked out gains of 1.2% and 0.4%, respectively.
Costco, though, isn’t just for bulk groceries. It offers a mind-blowing variety of products and services ranging from fresh produce to travel deals to -- believe it or not -- caskets. Budget-conscious shoppers find bargains on staples such as toilet paper and soda, while wealthier consumers get good deals on big-ticket items such as TV. The chain truly does have something for everyone.
In the latest quarter, which ended Nov. 25, Costco opened five new locations, and it plans to open five more in the second quarter and nine in the fourth.
Some on Wall Street, though, think that Costco may be running out of gas. The stock hasn't exactly been a barn-burner, gaining about 5% at a time when the stock market continues to post record highs. The average 52-week price target on the stock is $105.70, near its current price. It trades at a price-to-earnings multiple of 25.43, a five-year high.
Others, though, see better times ahead and recommend investors add Costco to their portfolios.
Keara, for one, recently upped his fair value estimate on Costco to $110. Trey Hays of Hodges Capital Management tells MSN that the stock has 10% to 15% upside potential from current levels. "That would not surprise me at all," Hays said.
Costco has proven the naysayers wrong in the past and may do so again in the future.
Was in both Costco and Walmart yesterday. One big advantage of Costco is that it appears that we are shopping with others of our species. Too many customers of Walmart cause me to fear that our country is doomed. Am puzzled that so many obese folks seem to think tatoos make them more attractive. Not to my old eyes.
Costco is getting more members and will continue doing so. Consumers are switching from Sam's Club and WalMart because of the good treatment by the corporation of both the employees and the investors. The difference in the attitude of the company will keep more consumers joining. The veggies are as good as you can get anywhere else and better than "discount" grocery stores. And, there is no BS with the possible exception of the occasional hard sell staff person.
The employees who start at Costco tend to remain working there for a long time because of the respect they receive from the company, the rate of pay and the health care coverage. Investors know that the corporation is not going to suddenly sell out or go bankrupt and will provide a reasonable sustainable rate of growth.. All in all, many of the marks of a good reliable American company.
Personally having a Sam's club membership I think Costco affects more Sam's club the Walmart.
I know Sam's is directly related to WalMart I get that. But in reality both Costco and Sam's sell in bulk quanity where Walmart is more for the weekly shopper. As for Costco doing so well? I think people today generally think everything goes up and does not come down in price. So they think buying more can somehow save them money. My question is how much stuff drops in price through sales or promotions? I cannot speak on my experience with Costco. But from my experience with Sam's club not everything is such a great price there. In fact I bought several items thinking they were great buys and come to find out my small grocery store had much better weekly deals on those same items on a price per volume comparison.
Costco proves that a company can pay a living wage with benefits to its employees, offer good products at good prices, and still make money for its shareholders. Unlike so many businesses, they don't pay their CEO millions of dollars per year. Do you see a correlation here?
Costco is obviously a great company, but with a P/E of 25 and PEG of 1.95 (for comparison, Apple's P/E is 9.7 and PEG is .51), the stock appears to be over-valued. I recommend buying puts or writing covered calls to protect yourself from its inevitable decline when Wall Street decides to dumps it.
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