With a stock that has produced a total return of 281% over the past five years, Costco (COST 1.01%) has long been a market outperformer, easily beating the S&P 500's 115% return during the same time period.
There's a lot for investors to love about this business. Charlie Munger, Warren Buffett's longtime business partner, sits on Costco's board of directors. And he hasn't shied away from publicly displaying his admiration for the company. This is a nice stamp of approval for other shareholders.
But even for such a popular stock, I'm sure there are some things you aren't familiar with when it comes to Costco's operations. Let's look at five important pieces of information that every investor should know about this top retail stock.
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1. Number of warehouses
As of March 17, there were a total of 829 Costco locations worldwide, of which 523 were in the U.S. (five are in Puerto Rico). These warehouses average roughly 146,000 square feet in size. And they sell less than 4,000 different stock-keeping units, which is far fewer than other major retailers. People come here to buy in bulk, making Costco a top shopping destination throughout the pandemic.
Customers can buy anything from groceries and appliances to jewelry and automotive supplies. Costco offers popular national brands, and it even sells gas. What shoppers love the most is the treasure-hunt atmosphere, with random, one-time deals on items, encouraging frequent visits.
2. Membership model
In order to shop at a Costco location, you must be a member. This means paying the $60 annual fee for the everyday Gold Star option. There are more expensive Executive and Business membership levels available as well with different features and rewards. This structure drives customer loyalty and stickiness while at the same time promoting repeat purchases.
As of Feb. 13, Costco counted 63.4 million membership households, up 6.2% year over year. And during the latest fiscal quarter, membership fee revenue totaled $967 million. Costco's renewal rate in the U.S. and Canada was a stellar 92%.
If you visit Costco frequently, the annual membership fee will more than pay for itself in the form of savings. From the customer's perspective, it's almost a no-brainer.
3. Intentionally low margins
Over the trailing 12-month period, Costco's net profit margin was just 2.6% (on revenue of $210.2 billion), a figure that is kept low on purpose in order to offer the lowest prices possible for customers. The gross margin stays in the low-to-mid teens, as management avoids marking up merchandise too much.
Costco has long operated with a business model that emphasizes sharing its scale advantages with its customers. The company's massive size allows it to negotiate extremely favorable terms with vendors -- savings that are passed on to consumers.
There's even an infamous story of Costco's co-founder, Jim Sinegal, telling the then-COO and current CEO Craig Jelinek that he would kill him if they raised the $1.50 price of a hot dog and soda combo at the food court. Keeping prices as low as possible is a relentless focus for the business.
4. Success of the Kirkland brand
Costco's private label, the Kirkland Signature brand, has been incredibly successful, accounting for 31% of total revenue in fiscal 2021. Products under the name include juice, cookies, housewares, luggage, clothing, and detergent. One item in particular, coffee, is actually brewed by Starbucks. Top national suppliers will produce goods for Costco because of its massive distribution.
Kirkland Signature items are meant to have equal or better quality than most well-known brands, but at lower prices. This creates a key competitive strength and differentiator for Costco as consumers develop an affinity for the brand.
5. Growth potential
The pandemic made it strikingly clear just how valuable a Costco membership can be. Having access to a one-stop shopping destination is important, so there is still an opportunity to bring this value proposition to more people.
Costco plans to open 28 net new warehouses this fiscal year. International markets are a focus as well, particularly China, where the business just opened its second location in December. Even domestically, there is ample opportunity to grow. "Our view is there's no reason to think for the next 10 years, we can't open 15 or so a year in the U.S.," CFO Richard Galanti mentioned on the Q2 2022 earnings call.
Knowing this critical information could give shareholders the confidence they need to continue owning the stock, which looks to have more market-beating years ahead.
