Costco: The Enigma

by: The Moneygardener May 30, 2008 | about stocks: COST    

The Moneygardener

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Costco Wholesale (COST) announced its latest quarterly earnings yesterday and surpassed expectations by posting a 32% increase in profit. In my "Costco" post back in October of last year I posted about why I choose Costco over any other retailer for most purchases.

Even in these times of economic hardship in the U.S., Costco just keeps blowing past expectations while retailers like Sears (SHLD) and Target (TGT) are struggling. Even so, the leading warehouse club operator remains somewhat of an enigma to most people. I have heard the business media describe Costco as a higher end retailer, while I've also heard the chain described as a place where people might shop when times are tough and they are 'trading down' to obtain some bargains. So which one is it?
 

Why is Costco shooting the lights out? It is because the company knows how to retail, and knows what people want out of a shopping destination. Its focus on low pricing has not clouded its view of what is important. If low prices were the only attribute Costco had going for it, then I'd certainly not visit the store as often as I do. Retailers know that if the story starts and ends with price they become a commodity trader fast. Wal-Mart (WMT) has also realized this fact.



Costco is successful because it's discovered what people want, and is convincing one customer at a time:

  • Quality - It offers second to none goods in every category, simply the best brands, and the best private label anywhere (Kirkland Signature).
  • Price - Have you determined that it is not the lowest price? You simply aren't doing the math, or you're comparing apples to oranges with respect to product quality.
  • Service - Every employee is pleasant - perhaps they like their jobs. Returning an item is easy, and its online store is great to use and delivery is often free.
  • Experience & Surprise - Food samples for all, new and interesting items seem to pop up every week. It offers coupons that actually save people money, photofinishing, the optical center, and the list is endless.

I believe that Bloomberg, CNBC, and alike have it all wrong on Costco. There is no trading down, or stocking up for the oncoming economic collapse going on. Rice hoarding aside, Costco is taking market share because it is simply BETTER, and is  getting BETTER at being BETTER all the time. Sub-par department and grocery stores are giving Costco an increased market share as each new Costco customer realizes the benefits above of shopping at the warehouses.

Disclosure: None

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This article has 6 comments:

  •  
    May 31 08:00 AM
    Costco employees are pleasant because they earn a living wage, with benefits, unlike other retail employees. The company has many loyal customers because of that fact.

    I just wish there was one closer to me, but now I know from your article they're online---
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  •  
    May 31 08:32 AM
    The story is good but you failed to mention anyting about valuation.

    At today's price of $71.32 it trades at 24x FY 2008 EPS estimates of $2.99 [FY ends August] and 20.8x FY 2009 estimates of $3.40.

    In the past 5 years COST's annual average P/E has ranged from 21x - 24x meaning the shares are now fairly priced for both this year and well into 2009.

    Great company at a non-discounted share price. For cap gains I'd wait to buy much cheaper. This stock sells off periodically and it should only be bought after a significant dip.
    Reply | Link to Comment
  •  
    May 31 12:20 PM
    Costco is solid because it has a clear mission: suppliers (we sell software at $1 to $2 by and large, up to $9.99 at high end outlets; therefore, Costco doesn't offer enough value discounting these kinds of items so leaves them to the Target, grocery, drug, and dollar chains); consumers (they know the deal); employees (not a complicated store for people to navigate).

    They are both "high" end (great values in bulk and big ticket items) and "low" end (great value on cereals, food, essentials). And, of course, most consumers buy some "high" end and some "low" end at the same time or different occasions.


    Continually impressive on all fronts. Awesome performance.
    Reply | Link to Comment
  •  
    May 31 02:43 PM
    I'm not big on Costco or Wallmart.. My wife liked both... I really don't like shopping for 200 lb packs of porkchops even if they are cheaper by 10 cents a lb.. I do prefer to begin my shopping at dollar stores and distressed or overstocked food outlets.. I curious why the "WallyWorlds"... do better than say DLLR?

    Thx jegan ;-)
    Reply | Link to Comment
  •  
    May 31 02:44 PM
    Boy the interface just butchered my post ... That's supposed to read "I'm curious" and "WallyWorld"... Thx jegan
    Reply | Link to Comment
  •  
    Jun 01 05:16 PM
    It's all about value. Rich folk, poor folk, and in between shop at Costco because they are the best. Don't like what they have today come back next week. KISS is the secret to success.
    Reply | Link to Comment
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