Costco Wholesale (COST 3.25%) is not a complicated business to understand. Its basic strategy to source quality merchandise, including food and beverage items, and sell it at the lowest possible price has delivered market-beating gains for shareholders over the years. A $1,000 investment in Costco at its IPO price in 1985 would be worth $370,000 with dividends reinvested. Most of that return, however, would have been realized in the last 10 years, in which the stock has climbed 410%.
It's the company's continued growth over the last decade that is very telling of Costco's resiliency and competitive moat. There's never been a more disruptive force in retail than the emergence of Amazon.com and the trend toward online shopping, and yet Costco continues to post operating performance similar to that of a decade ago.
Costco is one of the most consistent companies you'll find. The best way to get a handle on where Costco is headed over the next 10 years is to look back at where the business was in 2008 and compare that to where it is today.
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Costco 2008
In fiscal 2008 (which ended in August), Costco reported $71 billion in sales, up 13% over the year before. Net income was $1.3 billion, with practically all of that profit coming from membership fees of more than $1.5 billion that year. As it does today, Costco maintained a high membership renewal rate of 87%, which was the highest level ever at the time.
Management credited its results 10 years ago to an "intensely loyal" membership base. The one thing Costco has been known for is the treasure hunt aspect of finding new items at great deals. Management also credited the company's expanding specialty departments, such as gas stations and one-hour photo, as well as optical and hearing aid centers, for driving strong traffic to stores. Sales from these specific areas grew 30% in 2008 to nearly $11.6 billion.
Costco was also just beginning to gain traction with its e-commerce business, which generated $2 billion in sales in 2008. Management's goal was to grow online sales to about $5 billion over the next several years. Overall, they were calling for total sales to nearly double by 2018.
Check out the latest earnings call transcript for Costco.
Costco 2018 is not much different
Today, the only difference you'll find at Costco is that sales have grown to nearly twice the size of the level achieved in 2008 -- consistent with management's goal -- but the company's modus operandi of sourcing merchandise at low cost in order to resell at low prices is still the same. Total sales last year were $138 billion, representing growth of 9.7% over fiscal 2017. Net income has more than doubled to $3.1 billion, which approximates the growth in paid memberships of 51.6 million in fiscal 2018 compared to 25.8 million a decade ago.
The company continues to find new places to open stores. Costco opened its 750th store last year. More customers continue to flock to stores, as noted by the consistency in comparable store sales over the last decade. Comp store sales increased 9% in fiscal 2018, which is higher than the 8% reported in fiscal 2008. Additionally, e-commerce sales continue to climb, up more than 20% year over year in the last quarter.
In every way, Costco is still the same business it has always been, and I wouldn't expect that to change. The company still tries to "do the right thing," including in its negotiations with suppliers. Management continues to maintain a "steadfast commitment to value and integrity" in everything it does, from selling goods at the lowest possible price to how it treats customers and, most importantly, how the company treats its employees.
The company has made a point to emphasize the latter in its communications with shareholders, because without happy employees, Costco wouldn't be as successful as it has been over the years. The company's commitment to cultivating a good work environment is evident not only in its business performance but also by its actions. For example, management used the tax savings from last year's tax law changes to raise wages for most of their U.S. employees. Not surprisingly, Costco was named one of the top five best workplaces in 2018 among Fortune 500 companies.
Costco 2028
I believe the heightened competition presented by e-commerce, especially grocery delivery, will only make Costco stronger over the next decade. Management continues to focus its efforts on expanding selection across apparel and organic and fresh foods, as well as introducing new services like hotel booking. Costco's expertise at sourcing a range of items, including Super Bowl tickets and diamonds, and reselling them at discounts gives the company a wide moat.
The most telling sign that a Costco membership continues to prove its worth is that the membership renewal rate held steady at 90% in the U.S. and 88% worldwide last year. Most importantly, the company is seeing higher sign-ups among millennials, which is an important sign of Costco's competitive position given that nearly every young person has already shopped on Amazon.
All in all, investors should expect Costco to keep doing what it's doing and grow into a larger business in 2028, particularly as it continues to open warehouse stores both domestically and internationally.
