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3 Things to Expect from Costco in 2021

By Demitri Kalogeropoulos - Jan 5, 2021 at 8:30AM

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The warehouse giant may have a few surprises for investors this year.

Costco ( COST 1.65% ) seems to find ways to succeed regardless of the selling environment. The world's second-biggest retailer strengthened its connection with members around the world in 2020 as spending habits swung dramatically between categories like consumer staples, home furnishings, and discretionary products.

A pandemic-fueled stampede toward digital shopping couldn't keep the chain from ringing in higher sales and traffic at its warehouses, or from generating over $5 billion in annual operating income.

That surge sets Costco up for a likely growth slowdown in 2021. But investors still should expect mostly good news from the warehouse giant in the year ahead. Here are three things investors can expect.

A man shops at a warehouse retailer.

Image source: Getty Images.

1. More market share wins

There's never been a year with more significant changes to consumer demand, both in terms of spending priorities and with respect to how people chose to do their shopping. Those 2020 shifts opened the door to new competitive threats from online retailers and more traditional rivals ranging from Walmart ( WMT -0.32% ) to BJ's Wholesale ( BJ -0.32% ). Yet Costco held its own in this environment, boosting sales by 17% in the quarter that ended in late November.

Sure, BJ's reported faster gains in its latest quarter. But Costco's figures were held back by weak gasoline demand that should rebound in 2021. The chain's market-leading membership renewal rate, meanwhile (91% compared to BJ's 87%), is a strong sign that members are getting plenty of value from their visits. That's why we can expect Costco to outgrow most of its peers, even if gains slow as compared to the COVID-19 spike.

2. Declining cash returns

It's highly likely that shareholders will see declining cash returns in 2021. That's solely due to management's unusual approach to dividend payments that pairs a low quarterly commitment with infrequent special dividends. Costco's $10-per-share special payout in 2020 dwarfed its regular $2.40-per-share annual commitment. And while it's possible that the chain will surprise investors again in 2021, the company tends to spread out such payments over several years. The last one hit shareholders' accounts in fiscal 2017.

COST Dividends Paid (TTM) Chart

COST Dividends Paid (TTM) data by YCharts.

Costco ends up paying a healthy dividend if you include all those special outlays over the years. However, this isn't the stock for investors who seek high annual yields and predictably rising payouts.

3. Low profit margins

Costco notched a solid profitability increase in its latest fiscal year: Operating income rose to over 3% of sales. But investors shouldn't expect rising margins to amplify earnings ahead, as they have for peers like Target ( TGT 1.09% ).

Unlike its rivals, the warehouse giant doesn't aim to increase that figure over time. In fact, management has made it clear that its aim is basically the opposite -- to keep margins low.

COST Operating Margin (TTM) Chart

COST Operating Margin (TTM) data by YCharts.

That approach limits some of the investors' returns in a given year, but the trade-off is a highly loyal shopper base that's attracted to Costco's price leadership. "The best prices on great quality merchandise," CFO Richard Galanti explained in a recent conference call, "that's where we start from."

With store traffic spiking over 7% in the final quarter of 2020 and other engagement metrics like renewal rates reaching record highs, it's clear that this strategy is helping Costco maintain its leadership position.

That's just the type of long-term outlook that should pay off for investors. So if you don't already own the stock, 2021 is a good time to establish a position in this attractive retailing business.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$542.02 (1.65%) $8.82
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$138.55 (-0.32%) $0.45
Target Corporation Stock Quote
Target Corporation
TGT
$245.63 (1.09%) $2.66
BJ's Wholesale Club Holdings, Inc. Stock Quote
BJ's Wholesale Club Holdings, Inc.
BJ
$68.07 (-0.32%) $0.22

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

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