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Costco Is the Best Retail Apocalypse Stock of 2021

By Pearl Wang - Feb 10, 2021 at 9:00AM

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Here's a retailer that is well-positioned for a tough retail environment thanks to its loyal customers and merchandising strength.

While a number of retailers have struggled or closed stores over the last year, there is one consumer discretionary company that will survive and even thrive amid rising competition and economic volatility. Costco Wholesale (COST -0.83%) is a smart bet for investors seeking a stable company with a business model that appeals to consumers in both economic boom or bust environments.

Here's how Costco stock can hold steady even in the face of a retail apocalypse.

Costco Store

Image source: Costco Wholesale.

Costco has a very loyal customer base

One factor setting Costco apart from competitors is its loyal member base. U.S. and Canada membership renewal rates held strong at over 90% in the last two quarters. The company also steadily added new paid cardholders and executive memberships over the last year.

The retailer's business model is very customer-focused, offering a broad range of popular branded and private-label products at competitive prices. The shopping experience is resonating well with consumers, and at the end of the fiscal first quarter, total paid households stood at 59.1 million, up from 55.8 million in last year's third quarter which included the start of the pandemic.

Costco will benefit during times of economic uncertainty

Given the ongoing recession, shoppers are still gravitating toward stores that offer value-priced goods . As people feel more anxious about the economy, they'll likely look to shop where they can get the best deals. Amidst the pandemic, four out of ten Americans "are being more mindful of how they spend their money and believe their finances will not return to normal until late 2021 or 2022 and beyond," according to consulting firm McKinsey.

The retailer's most recent monthly results for Jan. 2021 (the four weeks ended Jan. 31) were better than expected with comparable sales up 15.7%. Costco continues to see strength across multiple categories, and it has benefited from shifts in consumer habits due to COVID-19 restrictions and social-distancing measures. Home goods and wellness products like health and beauty aids have been in high demand. "As people are spending less on air and travel and hotel and dining out, they seem to have redirected some of those dollars to categories like electronics, furniture and mattresses, exercise equipment, housewares, cookware, domestics, etc." noted CFO Richard Galanti on the fiscal first-quarter earnings call.

Even following a return to pre-COVID purchasing patterns, Costco has opportunities to boost revenue growth. First, e-commerce has been surging for the company, but it remains a small percentage of the total business at around 7% of revenue in the latest quarter (and 6% in fiscal 2020). And in its latest earnings report, e-commerce sales increased 86.4% year over year. Costco acquired Innovel, a delivery and installation company, in March 2020 to expand its e-commerce operation. Innovel focuses on larger items like appliances and furniture, offering Costco important fulfillment capabilities as it enjoys brisk sales of home goods.

Higher average tickets will help drive revenue growth

For December, Costco's average ticket increased 11.4%, the biggest increase since September, according to a UBS analyst. This means members are buying more per visit on their shopping trips.

As some supply chain issues remain due to disruptions from COVID-19 and increased demand of certain products, Galanti said during the earnings call, "If we could procure more, we'd have even higher sales. Examples would include things like exercise equipment, certain major appliances, certain electronics items, as well as certain housewares and small electric items." As supply chain disruptions ease, Costco will have an easier time sourcing in-demand items, potentially boosting sales.

Overall, Costco has navigated well through various levels of restrictions and social distancing since last March. Its business is also well-positioned as other retailers' businesses suffer from increased competition from giants like Amazon and declines in foot traffic. Even when routines do eventually normalize, the warehouse club's loyal customer base and curated, value-oriented products will help keep its growth going and differentiate it from the competition.

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Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$480.33 (-0.83%) $-4.04, Inc. Stock Quote, Inc.
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