Costco Wholesale (NASDAQ:COST) is a great company with a pricey stock. I shop at Costco. My late father loved Costco. I have owned Costco stock. But at $243 per share, its opening price on Sept. 10, it has a market cap of $106 billion and an above-average price to earnings ratio of 35 for a retail company expecting sales of about $135 billion when it reports its fiscal year Oct. 4.
For a retailer, that’s expensive. Walmart (NYSE:WMT) has a market cap of $280 billion on $500 billion in sales.
Retailers sell at a discount to sales because their margins are wafer-thin. Costco usually reports net income in line with the membership fees it collects. During the most recent quarter those fees came to $737 million. Net income attributable to Costco for the quarter was $750 million.
Customers Win
That means Costco is running the business at break-even, ploughing even the benefits it gets from its credit card relationship with Citigroup (NYSE:C) back into its low, low prices on high-quality goods.
This is great for me. I can get prime steaks at Costco for $10 per pound and bulk coffee beans for $7 per pound. Twice a year I go there for free, using the rebate on my credit card, which is even bigger on gas and travel than on Costco purchases.
But what about the stock? Well, for the last year, the shares are up 53%, against a gain in the NASDAQ of 22%. You even get a dividend of $2.28 per year. That’s less than a 1% yield only because the stock is up so much. Five years ago, the dividend was just 31 cents.
Costco is the mall of choice for the lower end of the upper-class professionals making six figure incomes, living in suburban splendor, the kids growing up around them. We load up the minivans every month or so and make a day of it, finding places for the mass quantities of toilet paper and discount meat in closets and freezers, sending the kids off to college with giant bottles of generic Kirkland-brand Tylenol and wearing its travel pants to community meetings.
No, really. I do that.
The Death of Sam’s
This has been killing Sam’s Club, the Walmart warehouse that was supposed to be Costco’s arch-rival. While Costco is opening about a store a month, investing $100 million in each, Walmart recently closed 63 Sam’s outlets.
Costco is so confident it still reports sales monthly. August sales came in at $11 billion, and e-commerce growth was 32% year over year. Costco’s top line benefits from rising gas prices and its penchant for keeping prices low has made it the home of gas lines in your neighborhood. Costco now operates 762 warehouses, 235 of them outside the U.S., including 13 in Taiwan and one in Iceland.
Costco even appears to be Amazon.com (NASDAQ:AMZN)-proof. While Costco’s $110/year executive membership and Amazon’s $120/year Prime membership would appear to be competitors, customers are well-off enough to afford both. When Amazon stock faltered early in September, Costco stock kept powering ahead — and its gains over the last three months are even better than its in-town Seattle neighbor’s.
The Bottom Line on Costco Stock
The only near-term risk with Costco stock is that the shares are not at a Costco price, and the economy seems to stand on soggy ground. That said, I always sell too early and missed last year’s gains. There’s also demographic risk. With my own nest now empty, we don’t go there as much.
Be ready to get out if the economic storms turn into a flood, but meanwhile don’t be as nervous as I am. Stay in Costco stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
