What Could Derail Costco's Growth?

Warehouse retailer Costco Wholesale (NASDAQ: COST  ) has some of the lowest margins in the business, because the membership fees it charges shoppers allow the company to earn a tidy profit while still passing on incredible savings to its members.

Costco's low prices haven't just benefited customers: Shares have walloped the market, returning 11,000% over the past two decades. However, with prices near their all-time high, is the ride over for Costco investors? To answer that, we've compiled a premium research report with in-depth analysis on whether Costco is a buy right now, and why. Today, you can get a sneak peek into this report, and see some of the critical risks Costco is facing.

Risks

  • Valuation
    High expectations are built into Costco's stock price, and its valuation can look more like that of a fast-growing tech company than a staid bulk retailer. These high expectations mean that Costco's share price can overreact to bad news like an earnings miss, causing a steep price drop. Investors can protect themselves and take advantage of this by starting to build a position slowly and buying on dips; for instance, when the price-to-forward earnings ratio drops below 20.

  • Market saturation
    With as many as 1 in 6 American and Canadian consumers already Costco members, the company may have already captured the most attractive markets. New store openings in less-advantageous areas could see less enthusiasm, lower sales, and fewer new members and membership renewals. Such headwinds would make it very difficult for Costco to grow into its valuation, and being forced to close underperforming locations could destroy shareholder value.

  • Competition
    Wal-Mart's Sam's Club warehouse concept has the resources behind it to fight Costco over every piece of territory. However, the two companies appeal to very different demographics: The only type of credit card Costco accepts is American Express, for instance, indicating a higher-income customer than Sam's Club shoppers. Similarly, smaller warehouse retailer BJ's Wholesale's acceptance of non-member customers (who pay a small surcharge) indicates a less-exclusive environment that may not be as appealing to the small-business owners, professionals, and other high-income households that are Costco's target clientele.

We hope you enjoyed today's sneak peek. Our premium research report also digs deep into the opportunities Costco Wholesale is looking to exploit, as well as the leadership team guiding the company forward. You'll also find reasons to buy or sell, a look at the company's management team, and the Foolish bottom line on Costco Wholesale. Best of all, the report keeps investors informed with a full year of analyst updates. To keep reading, just click here to get your copy today.


Read/Post Comments (4) | Recommend This Article (0)

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  • Report this Comment On November 29, 2012, at 10:30 PM, Bujutsu wrote:

    This article is innacurate, specifically the line which states:

    "The only type of credit card Costco accepts is American Express, for instance, indicating a higher-income customer..."

    For example, Costco in Japan (one of their fastest growing markets) also accepts MasterCard, specifically their co-branded credit card with Orico.

    http://www.orico.co.jp/merchant/costco/index.html

  • Report this Comment On November 30, 2012, at 9:45 PM, TMFCatoMinor wrote:

    Thanks Bujutsu, I didn't know that. I should have been more specific: Costco only accepts American Express in their American and Canadian stores, which account for the overwhelming majority of revenue.

  • Report this Comment On December 02, 2012, at 9:17 AM, Bujutsu wrote:

    You are welcome.

    However, I think The Motley Fool really needs to do more research before publishing articles.

    Just a 2-minute Google search revealed:

    Costco in the US accepts American Express, Visa, Master Card, Discover Card, Costco Credit Card, Costco Cash Card, and even "Bill Me Later."

    http://www.costco.com/order-information.html#paymenttypes

    Costco in Canada accepts American Express, Visa, Master Card, and the Costco Cash Card.

    http://www.costco.ca/order-information.html#payment

    Although things might have been different at one time, this doesn't seem to clearly indicate that Costco targets higher-income customers than other warehouse clubs. They all accept many of the same credit cards.

  • Report this Comment On December 02, 2012, at 12:50 PM, TMFCatoMinor wrote:

    Bujutsu, costco.com is a bit of a different animal than actual Costco Warehouses. Anybody can shop at costco.com, not just Costco members, although non-members do pay a bit more. As you noticed, costco.com also accepts all major forms of payment, but Costco Warehouses only accept American Express.

    The claim that Costco only accepts AmEx credit cards is true for about 90% of revenue, but I'll edit the report to read something like "The only type of credit card Costco accepts in its American warehouses is American Express, for instance. . ."

    Costco's predecessor Price Club was originally started to cater to small business owners, and actually was originally only open to business shoppers. Interviews with senior buyers and my own discussions with warehouse managers leaves me well assured that the company is still focused on customers who can recognize the value Costco offers, which typically means better-educated, higher-income shoppers.

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