Costco Wholesale Corporation (NASDAQ:COST) is the brightest star in the retail firmament, and COST stock — at least today — is reflecting that. The credit goes to a big number for the company’s March sales report.
But the reason for Costco’s broader success in retail is that it’s on really a true retailer.
Costco sells in wholesale quantities, and charges its members for the privilege of shopping there. Costco also takes half the retail margin of, say, Wal-Mart Stores Inc (NYSE:WMT), a minuscule 13%.
Shoppers know that, and they flock to Costco as a result. They certainly flocked in March, with U.S. sales for the month rising 7% over last year, driving COST stock to $171 per share early on Apr 6, near its all-time high of $178 per share achieved last month.
Until today’s news, Costco’s stock performance had been shadowing that of Walmart, which has been claiming big market share gains and has gone all-in online. The latest news halted Walmart’s momentum relative to Costco, and could quiet critics who believe that retail is peaking — or that no one goes to stores anymore.
Costco Has What Shoppers Want
It has long been obvious that what shoppers want are bargains. Malls don’t have a reputation for bargains, so people don’t shop there.
Big-box stores, built on cheap, greenfield sites out of cinder block, and with scaled control over entire categories of goods, have the image of creating bargains. Big-boxes are where we go when we want to buy. When we want to shop, when we want to spend time making choices, we let our fingers do the walking. But even here, we’re looking for bargains, which is why so many online shoppers wind up at Amazon.com, Inc. (NASDAQ:AMZN).
Costco has membership fees in common with Amazon. It costs $110 per year to be an “executive member,” and will soon cost $120, but that comes with a discount of 2% on purchases. Add the company’s credit card, now processed as a Visa Inc (NYSE:V) card by Citigroup Inc (NYSE:C), and you get additional discounts, like 3% off on restaurants and 4% off on gas. About 85 million people see that as a bargain and are members. (Full disclosure: I am one of them.)
Costco’s profits are usually equal to, or even less than, its income from membership fees. During its most recent quarter, which ended Feb 12, the company collected $636 million in membership fees and saw net income of $515 million.
While investors may salivate over the sales results, they should know that they don’t mean profit to them. For that, look at the membership fee line. The bullish cash for Costco stock is based on shoppers ignoring the membership fee price increase.
What Comes Next for COST Stock
While Costco is often accused of ignoring the online world, its business model based on people driving miles to fill minivans with bulk toilet paper and high-priced bargain wines, the company does care about technology.
You can see that in its newest board member, Kenneth Denman, whose appointment was announced March 20.
Denman has been CEO of wireless carriers Openwave Systems Inc. (now Unwired Planet) and iPass Inc., which creates global mobile accounts. His most recent company was Emotient Inc., an artificial intelligence platform to predict emotions by measuring facial expressions, based in San Diego. That company was acquired by Apple Inc. (NASDAQ:AAPL) in January 2016.
Denman can help keep the eyes of Costco’s board focused on the future, even while their present remains tied to the freeway. The company reportedly has plans to add just six U.S. stores this year, along with four in Canada and one in Mexico. Its own website lists just five new locations through June, including its first stores in Iceland and France.
Costco, in short, is a conservative company. Don’t be misled, by its good wages, cheap prices, or 21st century success into thinking otherwise.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AMZN and AAPL.
