Is Mr. Market Underestimating Costco's Potential?

After Costco reported strong sales metrics for the month of May, shares barely budged. Is this a sign that Mr. Market isn't giving the retailer enough attention, or is it evidence that Whole Foods or Wal-Mart might be the way for investors to go instead?

Jun 9, 2014 at 5:45PM


Source: Bob With via Wikimedia Commons.

After Costco Wholesale (NASDAQ:COST) reported sales results for the month of May, shares inched up 1% to close at $117.75 on June 5. When you take into consideration the fact that the S&P 500 index rose 0.7% for the day, Mr. Market's reaction to Costco's results seems inconsequential.

Is this a sign that the company's shares are peaking and that a stake in Wal-Mart Stores (NYSE:WMT) or Whole Foods Market (NASDAQ:WFM) could be a more sensible play? Or has the market downplayed what could signify a business whose growth prospects have never been better?

Costco's results were impressive
For the month of May, Costco reported revenue of $8.78 billion, up 8% from the $8.13 billion management reported for the same month last year. According to the company's press release, this jump in sales can be attributed, in part, to a 5% increase in store count from 627 locations to 657. Another contributor, however, was the company's 6% improvement in comparable-store sales over this period, driven by a 6% increase in U.S. comparables and a 4% increase internationally.


Source: Costco press release.

This performance brings Costco's revenue for the first three quarters to nearly $82 billion, up 6% from the $77.1 billion management reported for the first three quarters last year. Just as in the case of its monthly performance, Costco can attribute some of its revenue increase to a higher store count but must also chalk some of it up to a 4% increase in comparable-store sales.

Does Costco still have room to run, or are its peers better?
Over the past five years, Costco has been a true growth machine. Between 2009 and 2013, the retailer saw its revenue soar 47%, from $71.4 billion to $105.2 billion. In addition to seeing its store count rise 20% -- from 527 locations to 634 -- over this five-year period, the business has benefited from a 28% aggregate rise in comparable-store sales.

COST Revenue (Annual) Chart

Costco revenue (annual) data by YCharts.

In contrast, rival Wal-Mart's performance hasn't been anywhere near as impressive. Admittedly, the company is significantly larger than Costco, so it's expected to grow at a slower pace; but seeing sales increase 17%, from $408.1 billion to $476.3 billion, might make its shareholders envy Costco's investors. According to Wal-Mart's financial statements, the company only saw its comparable-store sales rise an aggregate 2% over the past five years, but management was able to make up for this by increasing the company's store count by 35%, from 8,099 locations to 10,942.

Undoubtedly, though, the real winner over the past five years has been Whole Foods. While Costco's growth has been impressive, the smaller Whole Foods managed to grow sales by 61%, from $8 billion to $12.9 billion. Over this time frame, the retailer grew its store count by more than 27%, from 284 locations to 362, and it also benefited from a 31% aggregate improvement in comparable-store sales.

On top of posting strong revenue growth in recent years, Costco managed to grow its profits rapidly. Between 2009 and 2013, the retailer saw its net income jump 88%, from $1.1 billion to $2 billion. This rise was due, in part, to its higher revenue, but can also be chalked up to its selling, general, and administrative expenses falling from 10.2% of sales to 9.7%.

COST Net Income (Annual) Chart

Costco net income (annual) data by YCharts,

Over a similar time frame, Wal-Mart saw its net income rise just 11.5%, from $14.4 billion to $16 billion. In spite of seeing a relatively high increase in revenue, the business' bottom line was negatively affected by its cost of goods sold rising from 74.6% of sales to 75.2%. During this same period, Whole Foods saw its net income soar 275%, from $146.8 million to $551 million; higher revenue was met with the business' cost of goods sold falling from 65.7% of sales to 64.2%, and its selling, general, and administrative expenses declining from 30.8% of sales to 29%.

Foolish takeaway
Based on the data provided, it seems pretty clear that Costco is doing well. In addition to growing over the long run, the company has managed to maintain a strong growth trend into this year, and it looks set to continue expanding its footprint. This alone makes the company an interesting prospect for the Foolish investor, especially when placed next to Wal-Mart. But with its superior growth rate, Whole Foods might make for a more interesting retailer to analyze.

Top dividend stocks for the next decade
One way to increase your portfolio's returns is to invest in companies like Costco that have a history of paying out dividends. However, there are a slew of other businesses out there whose yields are far higher than the retailer's, and they look poised to keep paying out for the next decade or longer!

The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Costco Wholesale and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers