Costco Wholesale (COST +0.25%) has been a reliable stock for years. The company consistently demonstrates sales and earnings growth, and its differentiated business model breeds loyalty and generates volume.
Even though it's different from a typical retailer, it's not the only player with this model. But it performs better than its peers. Let's see why, and what that means for its stock.
Costco isn't the only player in town
Costco has had an impressive run over the past two years, and higher-than-usual growth is finally beginning to slow down. But that changes nothing about the business model, along with the value that Costco offers, which makes it such a compelling stock to own.
Costco's moat is its strong brand as the unmatched leader in members-only shopping clubs. But two other companies operate a similar model: BJ's Wholesale Club and Sam's Club, owned by Walmart.
BJ's is a much smaller company, with 235 stores versus Costco's 847; Sam's Club operates 600 stores.
How these companies stack up against one another
Costco is the largest of the three, but Sam's Club isn't too far behind. However, Costco's average sales and income per store far exceed the other two.
| Company | TTM Revenue | Store Count | Revenue per Store | TTM Operating Income | TTM Operating Income per Store |
|---|---|---|---|---|---|
| Costco | $231 billion | 847 | $272 million | $18.7 billion | $22 million |
| BJ's | $18.7 billion | 235 | $80 million | $702 million | $3 million |
| Sam's Club | $82.1 billion | 600 | $136 million | $2 billion | $3 million |
Data source: Costco, BJ's, Walmart. TTM = trailing 12 months.
Costco charges $60 for a basic membership versus $55 at BJ's and $50 at Sam's Club. A premium membership is $120 at Costco and $110 at each of its two competitors. Costco's management has indicated that a price hike may be on the horizon.
Clearly, members see benefits to owning a Costco membership despite its higher price. It might be as simple as having a Costco warehouse closer to home, but there are other reasons Costco membership may have advantages.
What's behind the gross margin?
Costco's gross margin is lower than that of its competitors. Companies usually tout higher margins, but Costco deliberately keeps its markups as low as possible, resulting in low gross margins.
That formula is what makes customers loyal, generating higher sales. Strong volume trickles down to growing earnings despite the low margins, and Costco does this better than any of its small number of competitors.
COST gross profit margin (quarterly); data by YCharts.
Walmart doesn't break out a gross margin for Sam's Club; Walmart itself is a discount retailer, but its gross margin is a lot higher than Costco's.
Why is BJ's stock outperforming Costco's?
BJ's only went public in 2018, and its stock has done much better than Costco's over that time.
BJ's stock is also much cheaper than Costco's, trading at 19 times trailing-12-month earnings versus 37 times for Costco.
What I demonstrated above gives investors a clue as to why Costco stock is trading at a premium to BJ's. As for BJ's better stock performance, its net income has grown much faster than Costco's since the time it became a public company. It also might have larger expansion prospects as a smaller company.
While those features might be attractive to investors, I still see Costco as having the long-term edge. It is still expanding, both domestically and globally. Its net income may be growing slower, but that's part and parcel of its strategy: Its cash inflow is so large that it's enough to cover expenses, share buybacks, and a dividend without management raising prices to pump up earnings.
Most important, it has incredible pricing power in its memberships due to its lower pricing on products, and that is what will generate growth for a long time.
