Boring Portfolio

Boring Portfolio
Costco Call
Part 5

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (Oct. 15, 1999) -- This is a continuation from Part 4 of Costco Wholesale's (Nasdaq: COST) Q4 financial results conference call. The following is a summary of the Q&A with Richard Galanti, CFO.

Q: Could you go through the return on investment analysis on the closing costs.

A: Many of the buildings the company is closing are units that do $80 million to $90 million per year in revenues, some are $110 million going to $80 million and $90 million. Costco feels the units replacing these could get to $150 million in revenues if they get the right site and the right-sized building. "What we look at is, what is the incremental cash investment, what did you dispose of the property for, and in the case of demolition, what did you buy the extra land for, what did it cost you to build the new site, and what did you get from the $5 million write-off, which is a $2 million tax deduction. So that's kind of the way we look at it: What is the incremental cash investment and what is the incremental profitability?...

"What we did recently at Goldman and the DLJ conferences [two investment conferences at which the company presented] is show some examples. Here's one: Gilbert, Arizona. We opened this one in July 1999, which was a relocation of our Mesa site. The old location, during the 8-10 weeks prior to relocating, was doing $1.4 million a week. In the four weeks after [Gilbert] opened, it was doing $2.2 million, so up 50% in sales. If I looked at the last 15 to 20 relocations, comps jumped 25% to 45%. In Richmond, California (this is the demolition we did), the old location was averaging $2 million per week and this location is averaging $2.6 million per week, so that's up 30%. In south Orlando, Florida, which we relocated on August 25, 1999, the old location was doing right at $1 million per week, coming down a little, and the new location is doing $1.5 million a week.

"So, it's not only because we're adding 10% to 15% of new square footage, it's because we have better ingress and egress, in some instances we've improved the operating efficiencies, we've got better and more efficient receiving docks based on a higher-volume unit. Typically, we have a better traffic area.... Those are the reasons behind it. In terms of what is the incremental [internal rate of return]... looking at it in the past, it's been in excess of 25-30%."

Q: Do Wal-Mart's plans for Sam's Clubs expansion, especially in denser markets such as Dallas/Fort Worth, portend diminishing marginal returns in the industry?

A: "We'd prefer them not to, but of course, they'd prefer us not to, either.... When we went to Atlanta three years ago, they had seven units that had been there for as many as 10 years. They've acknowledged that their units have increased over the last two years and certainly our three units in that market did $190 million last year, or $65 million each, so there's more market opportunity in a lot of these cities. Certainly, we work on lower margins, as we do in other competitive markets. Well over 60% of our U.S. units have direct competition already. I don't think you're going to see the craziness you saw back in the '80s [going into] in a small town like El Centro, California, which is about 80 or 100 miles east of San Diego on the border, or in Nashua, New Hampshire, where you would see three of us go in there at one time. Will some markets be tougher than others?

"In cities the size of Atlanta, Detroit, and Chicago, there's plenty of room for both of us. In Memphis, for example, we're going to have two and they're going to have two or three, I believe. So maybe that's going to be diminishing in that market, but we think there's opportunity. More often than not, it's the Chicagos and Atlantas, however. We've increased activity and they've increased activity and we'll have to see. We do have several more sites and cities to announce over the next few months, we're not doing it for [reasons] other than that we think there are opportunities, and we would hope and expect to see the kind of results that we and our competitors saw by increasing the market presence of the concept in those markets.

"Without question, there will be a city we decided to go into and six months later we decide not to go into, so I'm sure that will happen as well.... These returns are not as good as opening up a Culver City, California unit, but they are good, and the way we look at it, our goal in a relocated unit is in the third year, we want a cash-on-cash return on investment, fully allocated return on investment, of 15%. We changed that for new markets to be a 15% return on capital in 4 1/2 years and even up to 5 years. But still, our intent is to be there for many years and we think that we do add something that is different.... We certainly have customers that overlap with competitors, but there are certainly customers that are totally different. We think we can both exist, as we have in many markets."

Q: Sam's new Elite Card, which is like your Executive Membership, seems to have a lot more features that are more usable or user-friendly on kind of a daily basis or a weekly basis or a monthly basis. Are you planning to add any features to the Executive Membership that'll make it more relevant on a week-to-week basis?

A: "We're intrigued by their Elite card. It's a consumer-oriented card and that's the area where we have the challenge. I would expect to do something -- I don't know if it will take the form of what they've done. I'm sure we'll include some aspects of some of the services, but I don't think it will be in the next month. That is one of the top priorities... in the Executive Member area."

On Monday, Q&A continued.


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Boring Portfolio

10/15/99 Closing Numbers
Ticker Company Dly Pr Chg Price
APCCAMER POWER CONVERSION-11/16$17.38
BRK.BBERKSHIRE HATHAWAY'B'-27$1,882.00
COSTCOSTCO WHOLESALE CORP-4 7/16$74.50
CSLCARLISLE COS-1 1/16$37.00
GTWGATEWAY INC-2 11/16$52.44

  Day Week Month Year
To Date
Since
10/1/98
Annualized
Boring -2.72% -3.49% 1.55% -.41% 24.73% 23.66%
S&P 500 -2.81% -6.63% -2.75% 1.48% 22.65% 21.68%
S&P 500(DA) -2.81% -6.63% -2.75% 2.06% 24.36% 23.31%
NASDAQ -2.67% -5.36% -.52% 24.59% 61.28% 58.32%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
2/9/99200GTW36.278$52.4444.55%
8/13/96200CSL26.325$37.0040.55%
4/20/99460APCC14.477$17.3820.02%
9/13/99110COST69.101$74.507.81%
12/31/9812BRK.B2,278.333$1,882.00-17.40%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
2/9/99200GTW$7,255.50$10,487.50$3,232.00
8/13/96200CSL$5,264.99$7,400.00$2,135.01
4/20/99460APCC$6,659.25$7,992.50$1,333.25
9/13/99110COST$7,601.13$8,195.00$593.88
12/31/9812BRK.B$27,340.00$22,584.00($4,756.00)
  Cash: $10,490.52  
  Total: $67,149.52  

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.