Over the long run, few companies can match the performance of Costco (NASDAQ:COST) stock. Since its first day of trading in March 1982, COST stock has delivered shareholders returns of nearly 24,000%. Better yet, Costco has largely avoided the extreme volatility that other retail stocks have exhibited.
To analysts and market observers, the resilience of COST stock isn’t surprising. Out of all the big-box retailers, COST has the most affluent consumer base. According to surveys conducted in past years, the average income of COST shoppers ranges from above $77,000 to $100,000. The wealth of Costco’s customers allows it to weather volatile markets better than its rivals.
In addition, Americans counterintuitively love super-sized warehouses. I’m not just referring to Costco. COST’s chief competitors like Walmart (NYSE:WMT) and Target (NYSE:TGT) — which already offer outsized stores — have their own “XL” options.
The Good Times Have Faded for Costco Stock
At a time when Amazon (NASDAQ:AMZN) is actively disrupting the retail landscape, the strength of COST stock represents an anomaly. However, some of the good times have faded. In December, Costco stock dropped nearly 12% after Wall Street panicked over the retailer’s first-quarter fiscal 2019 earnings report. While the company’s earnings per share only missed the consensus outlook by a penny, investors were disappointed by the decline of its margins.
In order to address rising competition, COST has invested heavily in its e-commerce platform. Additionally, Costco’s grocery sales came under pressure as Walmart, Target, Amazon and Kroger (NYSE:KR) stepped up their games in that area.
If that wasn’t enough, COST stock hasn’t kept up with Walmart stock in recent months. Since October, COST stock is down about 10%,versus Walmart’s slight gain of 2%.
While no one doubts the viability of Costco’s business, investors want to see positive returns from COST stock.
COST Stock Has a Key Moat
Admittedly, the lackluster performance of Costco stock doesn’t inspire confidence. COST stock pays a 1% dividend, but that’s nothing to write home about. Considering that many investors are seeking safe bets with strong passive-income potential, COST stock isn’t a fashionable name.
Nevertheless, the fundamentals of COST stock will almost surely win the day. Although COST lacks pizazz, the big-box retailer benefits from a consumer moat: its affluent and addicted customer base.
According to a Cowen and Co. survey in December 2015, Costco shoppers’ annual income averaged $77,400. The only retailers that catered to a wealthier clientele were Macy’s (NYSE:M) online platform and its brick-and-mortar locations.
Significantly, Costco beat out Target.com, which averages income of $69,900, and Amazon Prime shoppers, whose average income came in at $69,300. For all the talk about millennials killing Costco’s brick-and-mortar-heavy-business model, COST is getting the last laugh.
Thanks to Costco’s unworldly economies of scale, it’s able to beat almost anyone in terms of its prices on common goods. Not even Amazon can compete with COST in that area, bolstering the case for COST stock. Given the breadth of COST’s scale, the company’s pricing advantage will remain intact for quite some time to come.
It’s also important not to overlook the fact that Costco members pay for the privilege of shopping there. Worldwide, the company’s membership growth rate remains steady and impressive. In fact, last year the growth of the company’s global memberships accelerated slightly to 4.4% from 4.2% in 2017.
Within the disappointing Q1 earnings results, membership metrics represented a bright spot. Furthermore, the company’s renewal rates moved slightly higher, even though it increased its membership fees.
No matter what the retailer does, consumers won’t give up their membership. That type of addiction should boost Costco stock over time.
Costco Stock Hedges Against Economic, Political Uncertainty
If you saw the State of the Union address, you’ll immediately recognize that our country is incredibly divided. I’m surprised that we can even agree on (nearly) universally-accepted concepts, such as “increasing taxes on the middle class is bad.”
Of course, one dark cloud that has many Americans fretting is the government shutdown. We suffered a record-breaking one a few weeks ago. Potentially, we can have another one — if not soon, then perhaps in 2020.
Such prospects dampen the outlook for Walmart and dollar stores, since they rely heavily on volume. Certainly, a prolonged government shutdown will crimp the revenue they obtain from shoppers who use benefit programs like food stamps.
But the owners of Costco stock don’t have to worry about that issue. In a worst-case scenario, COST will be the last retailer to suffer a crippling blow.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.