No Ill Effects From Competition Seen at Costco

Stock (Symbol)

Costco (COST)

Stock Price

$193

Sector

Retail & Travel

Data is as of

January 23, 2018

Expected to Report

Feb 7

Company Description

Costco Wholesale Corporation is engaged in the operation of membership warehouses in the United States and Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, Spain, and through its subsidiaries in Taiwan and Korea. As of August 28, 2016, the Company operated 715 warehouses across the world. The Company’s average warehouse space is approximately 144,000 square feet. Source: Thomson Financial

Sharek’s Take

Investors slammed Costco’s (COST) stock after you-know-who acquired Whole Foods to get in the grocery business. But Costco is seeing no ill effects from the heightened competition, as profits jumped 16% last qtr. Sales rose 13% on a 11% surge in same store sales and a 43% jump in e-commerce sales. Costco is the 2nd largest global retailer, with 741 locations worldwide (as of fiscal 2017) including 26 new buildings during the year and another two relocations. Costco serves 50 million households in Canada, Mexico, the UK, Taiwan, Korea, Japan, Australia and Spain, with expansion opportunities in China as well as India. The profit Costco makes mirrors the annual membership fees it brings in. In fiscal year 2016 COST delivered a 11% gross profit margin, got 2% from memberships, spent 10% on selling, general and administrative fees, paid 1% in taxes and made 2% after taxes. On June 1 Costco raised its membership fees $5 for individual and business accounts, $10 for executive memberships — and this will be a nice boost to profits. Big stock buybacks help Costco achieve double-digit profit growth on just single-digit sales growth. The stock has an Est LTG of 10% per year plus a 1% yield and occasionally deliver big one-time dividends. COST is one of the world’s safest stocks. Its low prices ensure a strong and steady legion of customers (as 9 of 10 renew their memberships each year). I think Costco will be able to thrive in this new economy. It’s management is bright and trhives on efficiency. Last October it launched CostcoGrocery, a 2-day delivery service for items that don’t need refrigeration, and Instacart white label, with same-day delivery on 17,00 SKUs. I continue to like this stock for conservative investors.

One Year Chart

One thing that’s not getting airtime is a year or two ago COST was getting profits trimmed because of low gas prices and a strong dollar. Now gas has stabilized and the dollar has fallen, thus profits can grow in the double-digits again. Last qtr the company beat the street estimate of 13% growth and delivered 17%. 2018 profit estimates increased from $6.42 to $6.66. Qtrly Estimates call for profit growth of 23%, 16%, 9% and 18% the next 4 qtrs.

Fair Value

Costco went on a tear higher during the last qtr of 2017 and that’s left the stock in an undesirable position for long-term investors. I just don’t see a lot of upside when the P/E is 29.

Bottom Line

Costco has been a solid stock to own since 2009 and with profits growing in the teens again this stock should remain timely. But do notice that the Yearly Stock Growth Rate of 12% is higher than the Yearly Profit Growth Rate of 9% per year. To me that means the stock’s gotten ahead of itself. Still, I feel there’s great growth opportunity for this company in the home delivery space. COST ranks 25th in my Conservative Portfolio Power Rankings. This is a core holding for conservative accounts.