Please ensure Javascript is enabled for purposes of website accessibility

Can Costco Regain Its Mojo?

By Daniel B. Kline – Updated Apr 11, 2018 at 3:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The chain has been steady, but its stock does not always reflect its success.

While Costco (COST 0.64%) stock has not tanked, it has been trading below its 52-week high. Shares closed April 6 at $183.96, nearly 9% below their 52-week high of $199.98.

The warehouse club has struggled to keep share price momentum over the past few months. In general, while its stock has steadily risen over the past five years, it has also dipped on numerous occasions when the actions of other companies (such as Amazon's (AMZN 0.70%) purchase of Whole Foods) have convinced the market that Costco has become vulnerable.

To be clear, this is a case where the underlying company does not have a business problem: Costco's results have been steady, and sometimes impressive. Instead, it has a perception problem; the less-than-sexy nature of its business leaves some investors underwhelmed.

The exterior of a Costco store with a crowded parking lot.

Costco has not made the major changes some of its rivals have. Image source: Getty Images.

How is Costco doing?

The warehouse club has had a pretty stellar year so far. It posted a 9.4% year-over-year gain in same-store sales through the last six months, while its digital business has grown by 35%. Perhaps more importantly, the company has continued to add members, while maintaining a retention rate around 90%.

But while the company's stock has grown during that six month period, it currently sits below its highs (as of April 9). That's largely because Costco isn't particularly innovative. The company has a model that works, and while it tweaks it to account for changing consumer demands, it has not made the major shifts retailers like Target (TGT 0.71%) and Walmart (WMT 0.55%) have made to compete with Amazon.

It's perception, not reality

Walmart has invested in robots, omnichannel training for its employees, and a revamp of its supply line to serve individual orders. Target has revamped many of its stores, added more small-format locations, and has rolled out a number of private label brands. Both companies have also made huge investments in same-day shipping and other logistics involved with getting orders to customers.

Comparatively, Costco looks a lot less dynamic. The company has partnered with Instacart for same-day delivery, while it has made major investments in improving its website. It has also launched a service offering free two-day delivery on orders of non-perishable items over $75. A total box can weigh up to 40 pounds, and about 500 products are included in the offer.

The reality is that Target and Walmart had to make big changes to compete with Amazon. Costco was already the number one thing that has proven resistant to digital competition: a destination.

Consumers join Costco partly to save money, but also for the fun of discovery in its stores. Since the chain makes about 75% of its profit from memberships, its business relies on making sure customers renew each year -- something it has done very well.

Can Costco regain its mojo?

The thing is, the warehouse club never lost its mojo -- it's just not as splashy as its retail rivals.

Costco is the epitome of slow and steady. Its members join for a year, giving the company a base of stability. The chain's leadership can sit back, see what its rivals are doing, and make adjustments accordingly.

That's a solid operational model, but it's not always a recipe for stock market success. Costco looks vulnerable whenever Amazon, Walmart, Target, or another rival makes big changes.

The reality is that the membership-based chain has nothing to worry about. It's not immune to the shifts happening in retail, but it has the right approach to handling them. Costco may never be the hot stock or the company with swagger, but it's a very solid long-term play.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$483.39 (0.64%) $3.09, Inc. Stock Quote, Inc.
$115.96 (0.70%) $0.81
Walmart Stock Quote
$132.03 (0.55%) $0.71
Target Corporation Stock Quote
Target Corporation
$149.77 (0.71%) $1.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.