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11 Reasons to Buy Costco Stock and Never Sell

By Daniel B. Kline - Jan 17, 2020 at 7:55AM

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The warehouse club has shown that it can thrive while other retailers struggle.

Costco (COST 1.35%) has been a steady growth story. Even as the retail market has driven other chains out of business and forced major players to make huge investments in omnichannel, the warehouse club keeps moving steadily forward.

The company has shown that it's a force to be reckoned with and that it's more or less immune to what its rivals do. That makes Costco a stock you should put into your long-term retirement portfolio. Here are 11 reasons to buy and hold its shares.

The exterior of a Costco store

Costco has proven that it's a stable, growing business. Image source: Costco.

1. Costco sales keep rising

"Net sales for the quarter came in at $36.24 billion, a 5.6% increase over the $34.31 billion sold during the first quarter of last year," said CFO Richard Galanti during the chain's fiscal 2020 first-quarter earnings call. "Comparable sales for the first quarter of fiscal 2020 in the U.S. on a reported basis was 4.7%; ex-gas deflation, that was 5%."

Costco keeps growing its business, with these numbers being fairly typical. Sales are not the chain's most important measure of success, but having them rise is a strong positive.

2. Costco membership keeps rising

Costco makes about 75% of its profit from selling memberships. Signing up more people drives the business, and those numbers have steadily increased.

"In terms of number of members at Q1 end, member households and total cardholders at Q4 end -- back, I think, on Sept. 1 -- we had 53.9 million member households at Q1 and 12 weeks later ... 54.7 million. And total cardholders increased from fiscal year-end of 98.5 million to 99.9 million at Q1 end," Galanti said.

3. The chain keeps growing

While many retailers have been closing struggling locations, Costco has been steadily adding new warehouses, including in other countries. The numbers aren't huge -- usually just a few new locations each quarter -- but it's a steady pattern of growth.

4. Costco Executive memberships keep increasing

Costco sells two classes of membership. The higher-end one, Executive, costs $120 a year and comes with 2% cashback on most purchases up to $1,000 per year.

"At Q1 end, paid executive memberships were ... 21.4 million, an increase of 579,000, or 48,000 per week since Q4 end," the CFO said.

5. The company can raise membership prices

The warehouse club has raised its membership price roughly every five years. The most recent increase in 2017 was modest -- $5 for basic membership and $10 for Executive members. Consumers shrugged off the higher prices, and the company steadily added members and maintained its renewal rates in the year after the increase.

6. Costco pays a dividend

It's always nice when an otherwise sound investment also pays you to own the stock. Costco has paid a growing quarterly dividend for nearly 20 years now. The company has been committed to returning capital to shareholders, and that should continue.

7. Costco has paid special dividends

The chain has paid three special dividends since 2012. Galanti has dropped some hints that Costco may do so again, which is an added bonus for shareholders.

8. Costco digital sales are growing

While Costco has not been a digital pioneer, it has added online options and expanded delivery. Galanti gave some color on that part of the company in his remarks.

"Total online grocery continues to grow at a faster rate than the core e-commerce comps, although again it's a still relatively small piece of the business," he said. "We also, during the quarter, launched as a test in a few locations, same-day prescription delivery with Instacart. And we launched in the quarter same-day alcohol delivery, also through Instacart in California ... as of today, it's being offered in 12 states."

9. Costco has huge pricing power

Costco stocks a limited assortment of items and has a huge customer base. That gives it the power to squeeze vendors on the orders it makes in order to keep prices low.

10. Costco can own its supply chain

The warehouse club has traditionally sold its rotisserie chickens for $4.99. That's a very low price that has driven sales and traffic to its stores. To be able to hit that price point, the company actually cut out intermediaries by opening its own poultry farm.

11. Costco shopping is entertainment

Costco has the treasure-hunt aspect that many consumers like. You never know what you'll find when you visit the chain, so people often stop by just to see what the deals are, which can lead to impulse purchases.

Even if customers choose not to buy anything, they still come into the store. That makes a membership feel even more valuable and encourages renewals.

A very solid brand

Costco has shown that its business model allows it to adapt as the market changes. It does not need to innovate. The chain can look at what customers want and slowly add services and/or products as needed.

Having a loyal membership base fuels the entire business, and it gives Costco the freedom to put its money mostly into keeping prices low and rewarding shareholders. That's a recipe for long-term success that seems stable and sustainable.

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