Dueling Fools Below Costco
The Bear Rebuttal

By Rick Aristotle Munarriz (TMF Edible)
March 8, 2000

I was once like Chris. Happy as a clam in an acoustical haven of exposed beams and teetering racks. I went every week. Then every month. Then only when we were entertaining in our home. Then we stopped going completely and flung our Costco cards into the dumpster. Now, that was entertaining.

I just grew bored. The limited selection, which Chris points out, didn't make Costco a practical substitute for the neighborhood grocery store. The degrading cattle call of card flashing, forklift dodging, hand-slap sampling, jumbo-sized checkout lines, and cavity searches on the way out made me long for the convenience of traditional supermarkets. You know, the ones where it takes more than a cereal box to fill up the cart.

To Costco's credit, it didn't need me. I haven't been inside the place in years and it still flourished. Shareholders must be ecstatic. No wonder toilet paper is the company's best seller. Then again, maybe it's skeptics like me, arming themselves to T.P. the company's prospects.

Chris brands the company a "nearly flawless retail machine." Let's see. We have quarterly unit closures and relocations. Trendwatchers might be concerned that membership growth is slowing -- a bad omen for sales and earnings growth that is already leaning onto the brake pedal.

When my worthy Foolish counterpart mentions that the Costco system red flags any item selling for 14% above cost, I just cringe. I think a low price strategy is great for the consumer, but how so for the company? I want to seek out companies that have such a unique product or service that they can mark up aggressively, not down.

And what about these financials? I'm not sure why Chris decided to put Costco up against Wal-Mart. While Costco has expanded into more shelf-steady product lines, it is still a better match for the supermarket industry where spoilage invented the art of whirlwind merchandise turnover. As a matter of fact, Costco's inventory turnover is lower than the 12% grocery chain average. In the realm of asset turns, it is outdone by its pure rival, BJ's Wholesale.

So why Costco? Its own computerized pricing software probably red-flagged the shares themselves months ago. If the CEO claims the company won't "sell something if it can't save the customer money," why is the stock still trading?

I'm kidding on that last point, but be careful. You're dealing with a mature company that has come down to earth before the stock has landed. That's never a pretty sight. So, Chris, enjoy the store and enjoy the stock. Just remember, they both strip search you on the way out.

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 This Week's Duel

  • Introduction
  • The Bull Argument
  • The Bear Argument
  • The Bull Rebuttal
  • The Bear Rebuttal
  • Vote Results
  • Flashback: Intel

     Related Links

  • Costco Strategies Message Board
  • Costco Snapshot