Stocks Fools Love
Costco Wholesale Corp.

By Yi-Hsin Chang (TMF Puck)
February 8, 2000

Trading at $51 1/4 as of February 7, 2000

O Costco, how do I love thee? Let me count the ways.
I love thee to the depth of thy discounts -- thy low prices
Are sure to throw rival warehouse clubs into crisis.
I love thee to the height and breadth of thy stores, services and offerings,
From chips and beer, to salmon, champagne and other delectable things.
Plus name-brand clothes, office supplies, major appliances,
CDs, electronics, furniture, small household appliances.
I love thee for thy unwavering sense of commitment to quality;
Even thy private Kirkland label is good enough for nobility.
I love thee for thy constant heroic cost-cutting measures;
Shopping at Costco is really one of life's simple pleasures.
I love thee to the level of thy skyrocketing sales;
On a per-unit basis, Wal-Mart's Sam's Club simply pales.
I love thee for thy high sales volumes and rapid inventory turnover.
Thy steady stock performance shall make me enough to buy that Range Rover.
I composed the above Ode to Costco in November 1998, when I posed the Bull argument for the Dueling Fools on Costco Wholesale Corp. (Nasdaq: COST). I still love Costco.

For those who've not had the pleasure of shopping at Costco, Costco is a chain of discount warehouse clubs. A typical consumer can become a Costco card-carrying member by paying a $40 annual fee. That may sound hefty at first, but you quickly make it back, especially on high-ticket items. I once took a fellow Fool to my neighborhood Costco to introduce him to the store -- he walked out with a 30-inch TV. But even on everyday items, including fruits, vegetables, and meats, Costco is able to leverage its awesome buying power to offer the lowest possible prices to its members.

Regardless, Costco has a double unconditional guarantee: Not only does it offer refunds on every product it carries, it will refund your membership fee in full at any time if you are dissatisfied.

I've spent thousands of dollars at Costco -- believe it or not, it's actually hard to make a trip to Costco without spending at least $100 to $150 -- but I know I've saved hundreds. It was this plus the realization that the store I frequented was almost always packed that made me decide to invest in Costco in September 1998. To date, my investment has doubled, and Costco remains my favorite stock.

If anything, Costco is a more compelling story today than 15 months ago. The popular warehouse club saw its same-store sales surge 18% in December, and the company's on track to reach $60 million in online sales during its current fiscal year ending in August without really doing any advertising. Incidentally, Costco expects to make its Internet business, Costco Online, which carries mostly high-end (high-margin) products, profitable next fiscal year.

The amazing thing about Costco is that it's simply a more efficiently run business than its rivals. Costco stores attain much higher sales volume than Wal-Mart's (NYSE: WMT) Sam's Club chain and BJ's Wholesale Club (NYSE: BJ). In addition, Costco uses rapid inventory turnover, which allows it to operate on a fraction of the working capital needed to run say a Home Depot.

Plus, Costco buys almost all of its merchandise directly from manufacturers, eliminating many of the costs of multiple-step distribution channels. Through its strict monitoring policies, the company has limited inventory losses to less than one-half of 1% of net sales -- unheard of among other discount retailers.

Ultimately, what makes Costco do such good business is that it runs a good business. It's a warehouse club "dedicated to bringing [its] members the lowest possible prices on quality brand-name merchandise" by leveraging its tremendous buying power and constantly cutting costs. In fact, it carries only products on which it can provide significant cost savings. The company's operating philosophy: "Keep costs down and pass the savings on to our members."

What's more, Costco is far from saturating the market, seeing as most Americans (namely in the country's mid-section) don't even live near a Costco -- yet. The company now has 230 stores in the U.S., 59 in Canada, seven in the U.K., three in Korea, two in Taiwan, one in Japan, and 17 in Mexico. In short, Costco's business model easily translates abroad because shoppers everywhere like to save money.

Here are some key numbers on Costco:
  • Sales increased 13% to $27.46 billion in fiscal 1999.
  • Operating income gained 16% to $916.6 million.
  • Net income before one-time items rose 12% to $515.3 million.
For those Costco virgins out there, I strongly urge you to check out a warehouse near you (if there is one near you.) At least visit Costco Online. Pretty soon, you too will love shopping at Costco -- especially as a shareowner.

Next: Automatic Data Processing, Inc. »

Costco Company Information:
Trades on the Nasdaq under symbol COST
Costco is a Motley Fool NOW 50 Index Stock

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