Costco Wholesale (COST) shares have risen 24% so far this year (as of Aug. 14), outpacing the 16% gain by the S&P 500. That might indicate that investors view the company as somewhat of a safe haven during an uncertain economic time.
If you zoom out over the past five years, however, you’ll see that the retail stock’s 157% rise crushes the broader market. Costco has long been a winning investment, and I’m confident the business will continue to thrive for the foreseeable future.
So, if I was forced to pick just one stock to buy, I think it would be Costco. Here’s why.
Taking care of all stakeholders
Costco’s success is largely attributed to its low prices. Customers can expect low mark-ups on high-quality merchandise. And to incentivize them to visit the warehouses frequently, management often offers up surprise deals in what is known as a treasure-hunt shopping experience.
Besides customers, which should be a company’s top priority, Costco does a fantastic job at taking care of all other stakeholders. Employees receive above-average pay and a wide range of benefits, which impact the customer experience.
With Costco’s broad reach and massive scale, with 852 stores worldwide and net sales of $223 billion in fiscal 2022, suppliers gain a fantastic and almost essential distribution partner to help them grow their own sales. Costco also focuses on having a diverse base of supplier partners.
All of this, unsurprisingly, has resulted in outstanding returns for shareholders. The stock has been a long-term market outperformer. And Costco not only pays consistent dividends, but the leadership team also occasionally gives out larger one-time payouts, which also boosts investor returns.
It might not seem like a big deal that all stakeholders are in a good place, but this type of positive situation raises the chances that Costco can be successful well into the future. And that’s a trait investors should look for in the businesses they own.
A unique business model
Costco is currently the third-largest retailer in the world, a standing that certainly came about thanks to the company’s extremely low prices. These low prices are made possible by leveraging Costco’s buying power, ordering goods in huge quantities to secure volume discounts that are passed on to customers. A no-frills shopping environment also helps, where merchandise is often presented in the warehouse on the same pallet it was delivered with. And that helps reduce operating costs.
If this was all there was to Costco’s business model, it certainly wouldn’t be as wonderful of a business as it actually is. What makes this company unique is its membership model. Shoppers have to shell out $60 each year (for the basic plan) to be able to visit a Costco warehouse. As of May 7, the business had 69.1 million membership households in total.
By operating this model, Costco can drive greater customer loyalty, increasing visiting frequency and spending. Despite being in an uncertain economic environment, the membership renewal rate in the U.S. and Canada was a superb 92.6% last fiscal quarter (the third quarter of 2023, ended May 7).
Costco receives a high-margin and predictable source of recurring revenue. Membership fee income increased 6% in Q3, a faster rate of growth than merchandise sales. And what’s more impressive is that management has occasionally raised the price for these memberships. It’s been about six years since the last price hike, so another one could be on the horizon.
Thinking about the valuation
High-quality businesses, at least those in the same ballpark as Costco, rarely trade at cheap valuations. And this is true today. As of this writing, the retail stock is selling at a trailing price-to-earnings (P/E) ratio of 42. That’s far more expensive than Costco’s trailing-10-year average P/E multiple.
However, it still could make sense to buy shares in the company. Costco is a durable, steady, and relatively safe investment, in my opinion. And there’s still growth left, as management continues expanding the store base with each passing quarter.
That places the stock high on my shopping list.
— Neil Patel
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Source: The Motley Fool