Why You Should Stick With Costco Stock

by Jonathan Berr | October 10, 2013 12:47 pm

Why You Should Stick With Costco Stock

Even though Costco (COST[1]), the largest membership warehouse chain in America, posted its first profit miss in eight quarters, Wall Street took the news in stride and even sent Costco stock higher.

CostcoPromo Why You Should Stick With Costco Stock[2]Why?

Because Costco is that good.

Costco’s earnings stumble came because of higher-than-expected compensation and technology expenses, and wasn’t indicative of any operational problems. Moreover, even though the quarterly numbers from COST were not great, they were better than many of its rivals.

Costco is one of many retailers ranging from Nordstrom (JWN[3]) on the high end to Walmart (WMT[4]) on the low end to generate earnings that lagged Wall Street’s forecasts. Nonetheless, judging from its earnings, COST is holding its own in these challenging economic times.

During the latest quarter, Costco net income rose 1% year-over-year to $617 million, or $1.40 a share, and last year’s fourth quarter had an extra week. Meanwhile, sales were little changed at $31.77 billion.

But the key metric here is comparable sales, which measures performance at stores opened at least a year. Investors closely watch this since it excludes stores that have recently opened or closed. On that basis, Costco posted a 5% gain, which is outstanding. For comparison’s sake, Target (TGT[5]) reported a 1.2% increase in its most recent quarter, Macy’s (M[6]) saw a 0.8% decline, and Walmart’s same-store sales fell 0.3% in Q2 after a 1.4% decline in Q1.

Costco’s business model is equal parts genius and simplicity. Most of the company’s profits come from its membership fees, which enables the company to sell some products such as food and generic medicines for at or below cost. For consumers, the savings can be huge — particularly when compared with more conventional supermarkets, especially when bulk purchases are considered.

COST appeals to a broad set of customers. Families — particularly large ones — can save big money on their grocery bills. Small-business owners can find good deals on supplies. People who like to save a few bucks (and who doesn’t?) can find bargains on anything, including travel and even caskets.

Costco shoppers buy the chain’s rotisserie chicken, which goes for $4.99 and is delicious. COST also positions free samples around the store, which helps boost sales as well. The company’s white-label brands are also good buys. Frankly, my wife and I consider ourselves lucky if we get out of Costco spending less than $150.

Plus, Costco, unlike its rivals, also pays workers a decent wage, so if “socially conscious” investing is important to you — and it is for me — you can feel a little better about owning this stock.

One weakness to Costco stock is the company’s consistency; the same merchandise doesn’t appear week after week, which can be maddening at times. However, the bargains are so good that consumers appear plenty willing to put up with minor annoyances like this — and considering many Costco shoppers are bargain hunters to begin with, they’re trained to roll with the discount punches.

The other quibble that I have is that its pharmacy hours of operation are not convenient. For reasons that I can’t quite understand, my local Costco closes its pharmacy on Sunday when we usually do our shopping.

Costco stock has kept pace with the market, recording 17% gains in 2013 — enough to outdo Walmart, Target and Macy’s, among others. Although COST is trading near analysts’ 52-week price target of $118.59 and commands a premium to many rivals at a multiple of 22 times sales, I still think Costco stock has room to run.

The time to buy the shares is now.

As of this writing, Jonathan Berr was long COST. Follow him on Twitter at @jdberr.

Endnotes:
  1. COST: http://studio-5.financialcontent.com/investplace/quote?Symbol=COST
  2. [Image]: http://investorplace.com/wp-content/uploads/2013/10/CostcoPromo.jpg
  3. JWN: http://studio-5.financialcontent.com/investplace/quote?Symbol=JWN
  4. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  5. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  6. M: http://studio-5.financialcontent.com/investplace/quote?Symbol=M

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