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A Strong Case for Buying Costco

By Daniel B. Kline – Updated Jun 11, 2017 at 2:40PM

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The company may not be exciting, but it delivers.

If retail were baseball, Costco (COST 1.56%) would be a singles hitter who bats for average, plays good defense, and would never do anything flashy to show up a competitor.

That's the type of player fans overlook. Home runs attract attention, as does showboating, even when it's not backed up by long-term success. The same thing can happen in the retail world, where new concepts or emerging technologies become the flavor of the moment, causing a steady performer to be overlooked.

Costco is that singles hitter with good defense. There's nothing flashy about the chain. It's not at the leading edge of technology, nor is in reinventing anything. Instead, the warehouse club has a solid business model that brings back steady returns. That's something proven out over the years -- decades, even. The chain doesn't put up amazing numbers in any single quarter but instead delivers solid results year after year.

COST EPS Diluted (Annual) Chart

Image source: YCharts.

Costco keeps making money

This is not a chain that's going to make a lot of headlines, but it's one that's steadily made more money each year for about a decade. The warehouse club has increased its annual diluted earnings per share (EPS) each year since 2008, with the exception of a spike in 2009, followed by a slight dip in 2010.

The reason is simple: Costco has steadily expanded and each new warehouse increases the chain's membership base, which is where it makes about 75% if its money. There's very little risk for the company in opening new stores. It's a formula that works and simply takes time to implement. That means Costco won't be opening 1,000 new locations a year or quickly rolling out around the world, but it will be growing memberships, sales, and EPS every year.

The exterior of a Costco store, as seen from across a crowded parking lot.

Costco opens about 30 warehouses each year. Image source: Costco.

Costco is internet-proof (AMZN 2.57%) has made many retailers irrelevant. The online leader offers low prices and two-day delivery and has its own loyal base of Prime members who spend twice as much as non-members with the digital retailer. That's not very different from what Costco offers, but the warehouse club has shown that it can not only coexist but also thrive alongside Amazon.

Research from GfK, which eMarketer first reported on, showed that the people willing to pay Amazon $99 a year for Prime's free shipping (and other perks) join warehouse clubs such as Costco in higher numbers than non-members do. Essentially, these are people who simply like to shop, enjoy a deal, and are willing to pay an annual fee for access to the best deals.

That research backs up an October report from Morgan Stanley that showed that "Costco and Amazon can coexist." In that report, which The Seattle Times covered, Morgan Stanley surveyed 2,700 people and found that 45% of Costco members also had an Amazon Prime membership.

"Members of both Costco and Prime have not and generally do not intend to spend more with one retailer/e-tailer at the expense of the other," wrote the researchers, who noted brand loyalty as being a boon to both.

Costco is an experience

One of the reasons Costco has succeeded in a retail world where Amazon and other digital players have hurt so many other chains is that it's not just a store. Consumers have shown less willingness to leave the house to buy something, but they will go out for an experience.

Costco offers shopping as an experience. Its stores are part practical and deal-driven, but they're also fun. Consumers never know quite what will be on the shelves, nor do they walk in knowing what samples might be offered. The chain has made shopping a bit of a scavenger hunt while also offering food, a bit of fun, and a way to do more than get what you need.

The numbers are all there

In its 2016 annual report, Costco shows a number of stats going back to 2012. They paint an obvious picture of steady growth. The chain closed 2012 with 608 warehouses and finished 2016 with 715. Net sales during that period grew from $97 billion to $116 billion, and Gold Star memberships grew by a little over 10 million. Business members increased as well, going from 6.4 million in 2012 to 7.3 million at the end of 2016.

To go back to the baseball analogy, Costco is a compiler. The chain doesn't put up spectacular numbers in any one year, but it has built a solid foundation to produce and inch forward year after year. That may not make it an exciting chain to invest in, but it's most certainly a smart buy.

Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Costco Wholesale. The Motley Fool has a disclosure policy.

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