Costco Wholesale Corporation Proves Again That Brick-and-Mortar Retail Isn't Dead Yet

Many of the top names in big-box retail have been suffering recently because of the combination of choppy economic growth and the rise of e-commerce. However, discount warehouse chain Costco Wholesale (NASDAQ: COST  ) is a big exception to the rule.

After a fairly slow start to the 2014 fiscal year last fall, Costco has returned to form in recent months. On Thursday, the company posted a 9% rise in sales for July. Costco's consistent high single-digit sales growth will allow it to maintain its industry-leading cost structure and produce solid long-term earnings growth.

Another good month
In the four-week July retail month, Costco's total sales rose to $8.55 billion from $7.87 billion in the prior-year period. Comparable-store sales (a measure that excludes the impact of opening and closing stores) rose 5%, consisting of 5% growth in the U.S. and 6% growth internationally. This was a tad worse than some analysts expected, but still a very good result.

Costco is posting consistent comparable store sales growth.

Excluding the impact of currency and gasoline price fluctuations, Costco's comparable-store sales would have increased 6% year over year in July. On this basis, Costco has posted very consistent growth in the last few months. Comparable-store sales excluding currency and gas price fluctuations grew 7% in March, 5% in April, and 6% in both May and June.

Some of the strongest categories for Costco last month were fresh foods and soft goods (like apparel) -- both categories posted high single-digit comparable-store sales growth.

In the fresh food category, Costco has benefited from high inflation in some items. A variety of supply issues have driven prices higher for meat (particularly beef), dairy, and eggs in 2014. Costco has taken advantage of its massive scale to keep its purchasing costs down, and it has passed those savings along to customers, driving market share gains.

It's all about brick-and-mortar
Costco's strong results aren't an indication that the company has "figured out" e-commerce more than its struggling big-box competitors. Last year, e-commerce represented just over 2% of Costco's revenue, and that percentage is growing very gradually.

Indeed, on an earnings call last December, Costco CFO Richard Galanti was very candid about the company's e-commerce plans. While Costco is working to implement new capabilities for its website, Galanti made it clear that the main focus continues to be brick-and-mortar sales. Growth will come primarily from adding warehouses and increasing sales per square foot.

Amazon.com is growing rapidly, but Costco isn't scared.

A sustainable model
Despite relying on an "old-fashioned" brick-and-mortar infrastructure, Costco's business model appears to be sustainable. The rapid growth of Amazon.com has not had an appreciable effect on Costco's business thus far.

For example, Costco's comparable-store sales growth last month was right in line with the 6% growth rate (excluding foreign exchange rate and gasoline price changes) it has seen all year.

Costco's growth rate has also been very consistent from year to year. In FY 2009, comparable-store sales grew 3%, excluding the impact of currency and gasoline price fluctuations. That growth rate accelerated to 4% in 2010 as the global economy recovered, and has remained at 6% for each of the last three years.

The reason for this strong long-term growth is that Costco has by far the lowest costs in the retail industry. In an industry in which limiting overhead and labor costs (also known as SG&A) to 20% of sales is considered great, Costco has driven its SG&A expenses down to less than 10% of sales.

With lower expenses than any and all competitors, Costco can consistently offer eye-poppingly low prices. This drives customer traffic and builds brand loyalty over time. In the long run, this will allow the company to steadily increase membership fee income (which produces the bulk of its earnings) and gain global retail market share.

Foolish bottom line
For the past two decades, Costco has been bulldozing competitors by striving to be the most efficient retailer in the world. This also allows it to have the lowest retail markups in the world. This is such a strong value proposition that customers continue to flock to Costco warehouses even as e-commerce grows to represent a larger proportion of retail sales.

If Costco manages to turbocharge the growth of its e-commerce business through infrastructure upgrades and other initiatives, it will be a great boon for shareholders. However, even without a strong e-commerce arm, Costco is a formidable retailer that should post steady sales growth for the foreseeable future.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (4) | Recommend This Article (6)

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 August 07, 2014, at 4:14 PM, DoctorLewis4 wrote:

    Let me get this straight. Costco has been hitting homeruns for years now and is making tons of cash. Amazon hasn't really made any money. How did Amazon become the standard by which we measure retail? I don't get it.

  • Report this Comment On August 07, 2014, at 8:02 PM, TMFGemHunter wrote:

    It's a fair question. But Amazon doesn't need to be profitable to be the most disruptive force in the retail industry. Amazon's management appears to be happy with margins near 0 for the foreseeable future, as long as revenue keeps growing rapidly. Investors don't seem to care about the fact that it's not profitable, either. And Amazon is clearly taking business from a lot of the big names in the retail industry.

    Costco is one of the few big-box retailers that's actually posting really good results. Home improvement stores have been OK, too, perhaps because they deal with a lot of very bulky items.

    I wouldn't invest in Amazon at this point, because the stock seems way too expensive compared to the company's long-term earnings power. But it would be wrong to underestimate the impact Amazon is having on other retailers.

    Adam

  • Report this Comment On August 08, 2014, at 1:33 PM, anash91 wrote:

    Adam,

    I agree with you. Amazon is very disruptive but what happens when they need margins due to Alibaba entering the space and when companies catch up? I love Target's model of buy online pick up in store because I get it faster than Amazon Prime, and if I need to I can grab an extra few things in the store. I'm sure that will be a great force for Brick and Mortar. I'm not sure online will be the only way in the future, but I'm sure it will be a huge way of how we interact and make purchases.

    Adam

    (yes we share the same name)

  • Report this Comment On August 11, 2014, at 2:09 PM, TMFGemHunter wrote:

    Amazon's next move -- in big cities only -- is offering same day delivery. I'm not sure how broadly it will be feasible to roll out that feature. Obviously, Amazon needs to have every eligible item in a warehouse within the metro area to make that happen.

    My general experience with buy online, pickup in store is that the process needs to be streamlined. I've done this at a variety of major retailers like Target and Best Buy, and it usually takes way too long to pick up the item. Often it would be faster for me to just not order it online and walk into the store to find it myself.

    IMO, brick and mortar retailers can turn the buy online pick up in store capability to their advantage, but only if they can ensure a very quick checkout process.

    Adam

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3063344, ~/Articles/ArticleHandler.aspx, 12/20/2014 3:47:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement