Costco Wholesale Corporation (COST) Stock Is the Only Retailer Worth Owning

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The recent store closures announced by Sears Holdings Corp (NASDAQ:SHLD), Macy’s Inc (NYSE:M) and Aeropostale Inc (OTCMKTS:AROPQ) among others are just the tip of the iceberg crashing into bricks-and-mortar retailers. Costco Wholesale Corporation (NASDAQ:COST), however, can withstand the maelstrom of malevolent macroeconomic trends.

Costco Wholesale Corporation (COST) Stock Is the Only Retailer Worth Owning

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Real estate market research firm CoStar figures that a billion square feet of retail space will disappear in the coming years through store closings and, to a lesser extent, conversions to other uses such as restaurants and spas.

That means that the chains will be forced to unload underperforming locations at fire sale price as they pour billions into e-commerce operations to keep up with the likes of Amazon.com, Inc. (NASDAQ:AMZN). While the tsunami of store closings hasn’t hit big-box retailers like Wal-Mart Stores Inc (NYSE:WMT) and Target Corporation (NYSE:TGT), both companies are vulnerable over the long term.

Costco stock, though, has many things going for it. First, it operates 723 stores; tiny compared with Walmart (5,000-plus in the U.S.), Target (1,803), and Kohl’s Corporation (NYSE:KSS) (1,155).

Costco stock has plenty of room to grow both in the U.S. and overseas. In fiscal 2017, the chain will open 31 stores, 16 in the U.S. with others in Canada, Taiwan, South Korea and Mexico among other countries.

What Costco lacks in size, however, it makes up in financial strength. Wall Street analysts are expecting the Issaquah, Washington-based company to earn $126.7 billion in sales in 2016, well above the $69.84 billion forecast for Target and the $18.72 billion expected from Kohl’s.

Although its roughly 14% gross profit margins are on the thin side, COST mints money at a furious pace. During its latest fiscal year, it earned more than $2 billion in net income, more than double the $683 million that KSS earned and in same league as the $3.3 billion TGT earned even though they had much larger bricks-and-mortar footprints.

The secret to Costco stock success lies in its unique business model that charges membership fees for people to shop at its stores. Thus, the chain can keep prices low even when factoring into the bulk amounts that consumers must purchase. Those huge sizes protect Costco from having its customers poached by Amazon because shipping many of those products would cost a fortune.

The company even offers value-added services such as car buying assistance and travel deals. Moreover, COST has an excellent private label brand products. Its corporate culture is among the best in the retail industry. The chain pays employees a fair wage and doesn’t have the turnover problems of its peers.

In a recent note to clients, Cowen retail analyst Oliver Chen noted that the chain attracts well-heeled customers with an average household income of about $96,000, well above the U.S. median, which is about $52,000. The chain also attracts a fair number of small business customers, who according to the latest National Federation of Independent Businesses haven’t felt this confident about their economic futures in more than a decade.

Costco’s customers are also loyal. More than 90% renew their memberships, a telling statistic that shouldn’t change even if the chain raises its fees as expected. I own Costco stock and am a customer, so I knew from where I speak.

Bottom Line on Costco Stock

I decided to leave the best reasons to buy Costco stock for last. The company is so non-promotional that it doesn’t have a public relations staff and flies under the radar of most financial news sites. Lately, it’s been hurt by low gas prices, but that may not be a problem for long.

GasBuddy is predicting that the average price for a gallon of unleaded will average $2.49, their highest level in three years. Some pundits have accused Costco of dragging its feet on e-commerce which seems a bit overblown because the company’s bulk products would cost a fortune to ship.

Oppenheimer recently raised its price target on Costco stock to $180 from $175, roughly 15% above where it recently traded. In a note to clients reiterating his “outperform” rating on COST, analyst Brian Nagle said, “We have for a long while looked upon Costco as one of the best-run and most powerful retail chains in the world.”

Indeed, better times lie ahead for Costco stock.

As of this writing, Jonathan Berr was long Costco stock.

Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/costco-stock-cost-wholesale-corporation/.

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