A Costly Loss for Costco?

This article is part of our Rising Star Portfolio series.

It's been a tough week for admirers of star CEOs. First, Apple's (Nasdaq: AAPL  ) visionary Steve Jobs announced that he's relinquishing his post at the head of the company's daily operations. Now, Costco's (Nasdaq: COST  ) CEO Jim Sinegal has revealed plans to retire Jan. 1.

Sinegal's not vanishing completely, He will seek reelection to the company's board next year, and will serve as an advisor until January 2013. Perhaps because of that gentle transition, investors have thus far taken the news in stride. Costco's 11% surge in same-store sales in the latest quarter -- 6%, excluding fuel -- might also have lessened the sting of Sinegal's pending goodbye.

However, Sinegal's departure gives investors who value strong managers plenty of food for thought. Sinegal's been worth his weight in gold -- a valuable intangible asset who's steered his company into a strong competitive position against discount rivals like Wal-Mart (NYSE: WMT  ) , Target (NYSE: TGT  ) , and BJ's Wholesale (NYSE: BJ  ) .

Sinegal also set a high standard for behavior that more chief executives in corporate America should follow. His pay has never been outrageous; his base salary last year was $350,000. He has resisted Wall Street's short-term pressures and provided excellent benefits for Costco employees, recognizing that healthy, happy employees lessen worker turnover and help create a better customer experience.

Furthermore, Sinegal has consistently defended his long-term approach to building his company, in defiance of Wall Street's frenetic quarter-by-quarter profit demands. His old-fashioned approach to leadership includes answering his own telephone and paying personal visits to every Costco warehouse.

In fact, Sinegal's exemplary 20-year leadership of Costco was a major reason I purchased shares of the company for my socially responsible Rising Star portfolio. Costco is also a longtime Motley Fool Stock Advisor favorite.

Happily, fans of principled leadership have no reason to ditch Costco now. COO Craig Jelinek, a 28-year Costco veteran, is slated to succeed Sinegal in the CEO position. His lengthy tenure certainly implies that Jelinek's on board with Sinegal's vision.

Costco without Sinegal could be a strange place indeed. I feel so strongly about his wonderful leadership that I had to work hard not to freak out when I saw the news. But there's good reason to believe the strong foundation formed under Sinegal's stewardship remains reassuringly tough to crack.

The Motley Fool owns shares of Costco Wholesale, Wal-Mart Stores, and Apple. Motley Fool newsletter services have recommended buying shares of Costco Wholesale, Apple, and Wal-Mart Stores, and creating a bull call spread position in Apple and a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of Costco in her personal portfolio. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 01, 2011, at 2:50 PM, hbofbyu wrote:

    Alyce,

    Why would you freak out when you heard the news of Jim's retiring if you don't own any shares?Owning shares of Costco myself, I appreciate your empathy! :)

  • Report this Comment On September 01, 2011, at 3:12 PM, TMFLomax wrote:

    hbofbyu, I'm loaded with empathy! ;) Seriously, he is one of my favorite-ever CEOs and I bought shares of the company for my Rising Star portfolio for Fool.com (which is not my personal portfolio, of course). :) (And happy you, being a shareholder! Very awesome. :))

  • Report this Comment On September 01, 2011, at 3:25 PM, piranha60565 wrote:

    Alyce, would you still consider costco a buy? As someone relatively new to investing its hard for me to gauge how much a new CEO can change the direction of stock. Isn't a change in leadership a bad thing for potential buyers?

    I have always liked costco as a company but the company now has added risk without any added payoff..

  • Report this Comment On September 01, 2011, at 3:32 PM, TMFLomax wrote:

    piranha60565, I am still positive on Costco. As much as I hate to see Sinegal go, and that his departure certainly is a big change, I don't see any reason to conclude that his successor isn't going to run Costco the same way, given his long, long tenure with the company. Sinegal's built a gold standard company that is doing VERY well, and as much as this news is jarring (and should be considered in a buy decision), I'm hopeful the transition to a new CEO won't be a major change for the company's strategy and direction.True, it's a bit of a risk, but given the strong management of this company, I'd say it's less risky than would be the case at other companies.

    As for CEO changes in general... I think it depends on the CEOs and who's going to follow up, what their experience is, what financial condition the company is at time of departure, why the CEO departed, etc. These situations should be weighed on a case by case basis.

    I hope this helps!

    Alyce

  • Report this Comment On September 01, 2011, at 4:17 PM, piranha60565 wrote:

    It does Alyce, thank you. Well done so far on your rising star portfolio BTW. I enjoy watching what you guys pick and why. Keeps me from getting too bored at work :)

  • Report this Comment On September 01, 2011, at 4:23 PM, TMFLomax wrote:

    Great, piranha60565! I'm glad that helped! And thanks for watching us Rising Stars. :)

  • Report this Comment On September 01, 2011, at 7:23 PM, RushBabe49 wrote:

    I live in Costco's home territory, and 4 blocks from my local store. They have a corporate culture that is hard to beat, and it should continue after Sinegal's retirement. My stock is up 35%, and I intend to hold it as long as my portfolio lasts. I'd recommend it to any stock buyer.

    Carol K.

  • Report this Comment On September 03, 2011, at 2:37 PM, dernierdecri wrote:

    Leaders like Senegal cant be replaced. I am concerned of his availability, since there could be health reasons. I have the company as a core in my portfolio, and will continue for the time. The economic environment and retrenching and deleveraging of the American consumer has to be watched.

  • Report this Comment On September 08, 2011, at 11:21 PM, thidmark wrote:

    The guy is like 70-something. Is his stepping down really that jarring?

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