Why Costco lures shoppers -- and investors
The warehouse chain's strategy of appealing to a wide swath of customers -- and charging lucrative membership fees -- is paying off.
Costco Wholesale's (COST) hybrid approach that merges direct-to-consumer retail and bulk purchases to small businesses continues to be successful. The company’s better-than-expected earnings report yesterday underscores that point.Net income surged 19% in the latest quarter to $459 million, or $1.04 a share, from $386 million, or 88 cents a share, a year earlier. That beat the $1.03 per share profit analysts had expected. Revenue rose 7.9% to $24.1 billion, missing forecasts of $24.2 billion.
Investors, though, are willing to overlook this stumble because of Costco's unique business model that lures in consumers with prices for staples such as food, gasoline and generic medicines that are at or below cost. The chain makes its profits by selling memberships to its 627 stores around the world. That business continues to grow like gangbusters.
Membership revenue jumped 12% to $531 million in the most recent quarter. Even more impressive was the 19% gain in new member sign-ups, an indication of the company’s successful expansion into Japan. Renewal rates are about 90% when factoring in both business and individuals, showing the chain's sustained popularity.
And Coscto has aggressive expansion plans. During the current fiscal year, it will add 28 new stores, up from 12 in the year-earlier period.
One of Costco's biggest advantages is that it appeals to many different types of customers. Budget-conscious shoppers and small-business owners flock there for its low prices, while those with more cash to spend can buy big-ticket items such as home electronics, furniture and, believe it or not, even caskets. While shoppers are checking out chocolate cakes that can feed a small army, they can get their car's tires changed or peruse travel deals.
Investors, though, will find that Costco is worth the money. Its same-store sales, excluding foreign exchange rates and fluctuations in gas prices, surged 7% in the latest quarter. That was a far better performance in this key retail metric of sales at stores open at least a year than Wal-Mart, which posted a 1.4% U.S. same-store sales loss in its most recent quarter. It also handily beat Target, which posted just a 1.6% gain.
Investors should wait for the stock to pull back some before pulling the trigger. Getting Costco shares at a better valuation should prove as good as any deal you'll find in the company’s aisles.
Got any questions about this or any other "Killer Companies" episode, or suggestions for companies to cover? Drop us a line in the comments section.
Jonathan Berr owns a small stake in Costco. Follow him on Twitter @jdberr.
I hope Costco puts Sams Club out of business, they have a CEO who realizes that you should pay workers a livable wage and gives health benefits to everyone rather than padding his own salary. On top of that one of the more successful businesses around, very low turnover and from what I have heard, a great place to work.
This shouldn't be an anomoly, but sadly in America it is - what exactly does a CEO do that is worth the yearly salary of 1000 employees I wonder?
Costco is a great company because co-founder and former CEO James Sinegal believed that employees were the key to a successful company and he didn’t just talk the talk about treating employees right and paying them well, an average of over $40,000/year, he walked the walk. He stood his ground to shareholders that thought employees should be paid less and have less benefits, and now these stockholders are smiling all the way to the bank with great quarterly earnings while other companies make excuses for low sales. New CEO Craig Jelinek continues this philosophy. In return, Costco attracts a more professional workforce , with an incredibly low turnover of about 5% . These workers want to go the extra mile for the customers and the company, as they feel as valued by their company. Costco doesn’t forget that their members willingly pay a membership fee and the company tries to give them a good shopping experience with higher quality merchandise and variety. Costco also attracts a wide range of members, including the all important higher income members who aren’t as affected by downturns in the economy, as are moderate income shoppers. Costco is a good corporate citizen because employees are paid a living wage, so employees’ wages do not need to be subsidized with taxpayer funded Medicaid and food stamps.
I like the idea of employee retention. Nice to see familiar faces. Means they are reasonably happy with the workplace. I read somewhere, the only competition Walmart is worried about is Costco.
50 pound sack of rice, 25 pound sack of pinto beans and 20 gallons of milk can be purchased at costco for $100 or less.
This is enough to feed a person for about 6 months, and we think we still a foodstamp program, this proves they just exist to buy votes.
Looks like the ' if we raise the minimum wage business will suffer' crowd are full of it. Just like with providing health care!
All previous comments agreed , But Costco has consistently raised prices for multiple food items and the gap for bulk prices vs retal prices at other stores has norrowed considerably, to a point that it makes no sense to buy the bulk items anymore. Also, in the food category, they have in the name of better product, created a line of premade foods and pasta while reducing the inventory of ingredient items or uncooked items. All snack items used to bei the range of 5-8 dollars and all those things with different packaging and lesser weight are now at 9-14 dollars. Almost doubling the prices.
In the fruits, the prices have almost doubled for some items and the quality has gone down, especially for grapes, stawberries etc that i have noticed.
You can still get good deals at Costco however they are now reducing.
Costco has stretched the price elasticity to the maximum and unless they control it, the numbers will be going down from here.
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Killer Companies is a look at companies in the headlines that are killing it and getting killed in the market today.