Whether it's the free food samples, great deals, or easy checkout process, customers love Costco Wholesale (COST 0.32%). It has consistently growing revenue and membership numbers (including a high member retention rate), and despite its bare-bones warehouses, a trip to Costco makes for a great family outing. (Or is that just us?)
Shares of Costco stock have returned value to investors over time, but is it a millionaire maker? Let's find out.
How Costco differentiates
Costco's platform is unique in several ways. First, it requires a paid membership. Joining costs $60 annually per household for the simplest membership and $120 for the premium card. For business members, additional cards cost $60 each.
Image source: Getty Images.
Customers don't balk at the fairly hefty fee because they see tremendous value in their memberships, from excellent prices on ordinary household groceries and other goods to discounted travel and optical services. In March, the company reported that membership income increased 6.3% year over year to $816 million in the second quarter of fiscal 2020, similar to the increase in the first quarter. Costco grew its membership count by about 600,000 households during the second quarter, which all came from existing stores.
The second way Costco is different is its bulk-buy model. Costco stores are huge, rustic warehouses. This keeps costs down, and the company passes that on as savings for customers.
Costco's not the only player in this market. Sam's Club, owned by Walmart, and BJ's Wholesale Club both operate according to a similar model and are competitors in the bulk-buy space. Sam's Club had 2.2% comp sales growth in the fourth quarter of Walmart's fiscal 2020, bringing its total revenue to $15.3 billion. Membership income increased 3%.
Costco has more than double Sam's Club's sales and growth, with $38.26 billion in revenue in its fiscal 2020 second quarter, a 10.5% increase year over year. BJ's is much smaller than both outfits, with $12.7 billion in annual sales.
As long as Costco can continue meeting customer expectations, it doesn't have any strong competition. But is there really more room for growth?
Plugging through a pandemic
Despite its massive sales, Costco has continued to see high growth, justifying its shares' hefty price tag. It trades at 36 times trailing 12-month earnings, much higher than Walmart's 23 times earnings and Target's 18 times earnings. But it also sees higher comparable sales increases.
|
Company |
Comp sales growth Q4 (Costco's Q2 2020) |
Comp sales growth Q3 (Costco's Q1 2020) |
Comp sales growth Q2 (Costco's Q4 2019) |
Comp sales growth Q1 (Costco's Q3 2019) |
|---|---|---|---|---|
|
Costco (U.S. only) |
9.1% |
4.7% |
6.2% |
7% |
|
Target (2019) |
1.5% |
4.5% |
3.4% |
4.8% |
|
Walmart (U.S.) (2020) |
1.9% |
3.2% |
2.8% |
3.4% |
Data source: Costco, Walmart, and Target quarterly reports. Chart by author.
Earlier this month, Costco released its April sales figures. For the first time since 2009, sales decreased year over year. Although the company saw a sales spike in February due to COVID-19, it suffered from the pandemic in April due to parts of stores, such as optical and photo departments, being closed. However, with stores reopening, it's unlikely Costco will see any decreases in quarterly earnings. It could even see an uptick as customers return, keeping close to its regular growth even through a pandemic.
Will it make you millions?
So is it worth the price? Despite the high price tag, Costco's share price has increased consistently along with sales over the years. Take a look here:
Costco Wholesale's Quarterly Sales and Share Price, data by YCharts.
Costco stock has delivered a total return of 564% for investors over the past 10 years. At the current price of around $300, with a relatively high price-to-earnings (P/E) ratio, that's not so likely to happen again over the next decade. So while Costco is a good long-term buy, with a high probability of increasing value for shareholders, it's not likely to make anyone a millionaire unless they have a lot to invest to begin with. Otherwise, stick with Costco as a secure investment in a diversified portfolio.
