Costco Wholesale's (COST -1.53%) stock price spiked during the pandemic, reaching a peak of around $393 a share in November 2020. The company benefited as it was deemed an essential retailer when many other businesses were temporarily forced to shut their doors to in-person shopping.
Surprisingly, sales have held up well into 2021 even though economies worldwide are reopening. Folks are finding value in the company's ability to offer relevant items at famously competitive prices. That strong reputation with consumers built over decades is one of at least three reasons why I'm buying the stock during the next stock market crash. Let's take a closer look at these three reasons.
1. Costco is supported by a powerful revenue flywheel
Costco's nearly 90% retention rate among its annual members proves it has a strong relationship with its customers and gives the company a competitive advantage.
Folks value the privilege of shopping at Costco so much they are willing to pay for it. Annual membership fees cost between $60 and $120. Indeed, Costco reported having 60 million paying members as of May 9. That loyal customer base gives Costco's merchandisers strong purchasing power when negotiating with suppliers, further supporting its ability to provide competitive prices for its members. This virtuous cycle helps fuel steady growth.
2. Membership price increases
Historically, Costco has increased membership prices on average of every five years. If it stays true to form, the next price increase could be coming in the next 18 months. Considering membership renewal rates have remained near 90% during the pandemic, it appears that most will be willing to pay the incremental increase on their annual membership.
Additionally, Costco's membership fees are nearly all profit. Despite offering products at a competitively low margin to its members, it still earns a gross profit margin consistently in the low double-digit percentages. The company earned $5.4 billion in operating profits during 2020. Doing some back-of-the-envelope math, a $5 annual increase in membership fees on 60 million members could add $300 million in operating profits. And the strong customer relationship built over decades could allow it to put in a price increase without losing many customers.
3. Expansion opportunity
Costco has 809 warehouses in operation, with 559 domestically and the rest international. Management believes there is room for expansion. Indeed, it has laid out plans to add 21 stores in 2021, 25 in 2022, and 25 in 2023. Combined, that would be an 8.7% increase over its current store total. And with more locations will likely come more members. At this controlled pace, there are still plenty of locations and markets to expand into for years to come.
With the excellent prospects mentioned for this retailer, you may ask why I don't already own the stock. I have hesitated to buy Costco stock thus far in large part because of opportunity costs. I have found better values elsewhere.
As of this writing, the stock is trading for a forward price-to-earnings ratio of 36. However, if Costco's share price falls along with the market during the next stock market crash, I will likely add it to my portfolio.