Don't Chicken Out on Costco

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Costco (NASDAQ: COST  ) moves a lot of rotisserie chicken; this product offering is major enough to be mentioned in the company's last quarterly conference call as a popular, high-volume product in its stores. Lately, though, Costco has moved a lot of chicken investors to fly the coop, causing the stock price to lose some traction.

One of the recent bouts of rare Costco pessimism related to its recent fiscal first-quarter earnings. To many, the company's lower-than-expected profit blamed on operational costs sounded like a major step in the wrong direction.

Still, it isn't like Costco's looking individually weak in the current landscape. The entire retail industry is duking it out for consumers' dollars this holiday season. Many consumers don't feel comfortable with their budget constraints. In the last quarterly earnings period, big companies like Wal-Mart (NYSE: WMT  ) and Target warned about their coming fourth-quarter outlooks.

In just one example of current big-box desperation, last week Wal-Mart announced it will sell Apple iPhone 5c's for just $27 (with a two-year contract) for the holiday season in one of several deals on Apple electronics including the iPhone 5s.

Given the overall environment, though, long-term investors should carefully choose which retail stocks they buy or flee. As has been the case even during the bearish financial crisis marketplace, buying and holding the highest-quality retail stocks has been a smart and more secure way to go.

Speaking of current Costco questions, (NASDAQ: AMZN  ) has been a major thorn in almost every big-box retailer's side. Best Buy (NYSE: BBY  ) has been one of the highest-profile companies that suffered from Amazon's prices and convenience, and the online retailer has often been blamed for Best Buy's ills.

Although many investors believe that Best Buy is well on the road to recovery, it's still reporting losses and simply has to aggressively address holiday price wars.

Costco, on the other hand, hasn't received as much attention as possibly suffering from Amazon's aggressive competitive power.

A prime pantry
In fact, right now, word of an Amazon service called Pantry is also ruffling some feathers. It's viewed as a direct shot at Costco's strength, not to mention Wal-Mart's Sam's Club. Pantry, which is rumored to launch next year, will help Amazon expand its tendrils into groceries.

Amazon hasn't commented on Pantry yet; it's still a private matter. However, according to the always mysterious "people familiar with the matter" in financial reportage, the service targets the center of the grocery store. This is where shoppers get sometimes annoying items like cleaning products, pet supplies, and paper goods like toilet paper and paper towels.

Still, we can make a parallel to Best Buy, actually shining a more positive light on Costco's strength. In Best Buy's case, it isn't as if Amazon had suddenly begun shipping electronics and started putting the pinch on Best Buy when the brick-and-mortar electronics retailer began to flail. It had been doing that all along. Best Buy's problems were largely its own doing, including years of instability with CEO changes and its chairman and founder Richard Schulze's departure.

On the opposite side of that argument, Costco has already been competing with Amazon on many fronts. Amazon already allowed consumers to order bulk items like toilet paper for delivery. This isn't a new competitive jab at Costco, and clearly it hasn't hurt Costco so far.

Costco and competitive advantage
Costco does many things right in its actual business operations, and that's part of why it's one of the strongest and most stable companies investors can hold in their portfolios.

Pitting these two giants against each other may in fact mean very little to either one; there's room for both. Costco's solid employee treatment and customer loyalty give it competitive advantage against brick-and-mortar retailers.

Amazon, which isn't known for good employee treatment -- and it could do much better in this area, by the by -- also manages to drum up customer loyalty through low prices, the ability to get pretty much anything, and sticky services that drive more business, like Prime.

Right now, there's little reason to believe these two retailers won't be able to coexist in the competitive environment. It's the conventional, less well-run companies that really face a scarier environment with services like Amazon Fresh and Pantry.

At some point lower prices won't be worth the hassle of going to retailers that lack serious competitive advantage, and have to draw more traffic by offering, say, Apple products for the cost of a dinner out.

It's no time to chicken out and sell shares of Costco. Investors may want to wait for a cheaper price on the stock in case investors continue exhibiting unwarranted pessimism, but this gold-standard stock is arguably just about always a solid purchase for buy-and-hold investors. It's one of the best companies out there.

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Read/Post Comments (4) | Recommend This Article (5)

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  • Report this Comment On December 17, 2013, at 12:40 AM, dave923 wrote:

    What a BS story. What makes you think anyone is giving up on Costco? The media runs any story they want to make up, and then thinks it will sway opinion.

  • Report this Comment On December 17, 2013, at 10:35 AM, charles67 wrote:

    Alyce, thanks for your valuable insight! I'm new to COST but my family has been a customer for years. I believe you are right that it is a high standard operation. It's quite a money maker in my area. It's no accident we call it the $100 store because you can never seen to leave without purchasing a minimum of $100 worth of products & services, all the while saving a bundle on quality items.

  • Report this Comment On December 17, 2013, at 11:06 AM, nevadan99 wrote:

    Costco isn't always the cheapest. Bought a washing machine, at Best Buy, same make and model that Costco had for $100.00 less and it was delivered.

  • Report this Comment On December 18, 2013, at 11:48 AM, crash3085 wrote:

    Costco is almost never the cheapest on appliances and electronics, nor is their selection very good on those items. However, where they kick everyone elses butt (especially Best Buy) is with their service. And most other things in their stores are good values, so they make up for it. I shop at Costco quite a bit, but 99% of the time I just walk on by the electronics section because I know that's where they get you.

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