Costco Wholesale (COST 0.70%) is a well-known stock on Wall Street. The warehouse giant joined public markets in late 1985 and has been the world's second-largest retailer (behind Walmart) for many years.
Yet there's still a lot about Costco's business that many investors miss. Let's look at a few factors that make the company stand out from all of its retailing peers.
1. Costco wins in many selling environments
A big proportion of Costco's sales are in the so-called consumer staples niche that's populated with day-to-day necessities like groceries and home cleaning supplies. That focus is one reason why the stock isn't heavily exposed to a recession as demand for these essentials remains relatively stable.
Yet the chain also sells lots of discretionary products like consumer electronics and home furnishings. This balance allows it to outperform more specialized peers like Target (NYSE: TGT) and Kroger (NYSE: KR), through a wide range of selling conditions. Costco's last earnings report showed a 7% spike in comparable-store sales, compared to Target's 1% increase and Kroger's 6% boost.
2. It's all about membership fees
Unlike most retailers, Costco generates almost no profit from its merchandise sales. Gross margin hovers at around 12% of sales, or less than half the rate of its peers.
Yet Costco generates steadier profits because those earnings mostly come from membership fees. While gross profit margin can swing along with consumer demand patterns, subscription fees don't move nearly as much. That one factor helps explain why Costco's stock is valued at such a premium compared to almost every other major national retailer.
Costco is also due to raise its yearly fees now that roughly five years have passed since its last hike. Investors shouldn't get too excited about this move, even though it has the potential to dramatically boost earnings. Costco tends to take a longer-term approach to these increases by pouring almost all the cash it generates into maintaining its price leadership position in the industry.
3. Loyalty speaks volumes
Shifting consumer preferences are famously erratic. In just the past year, for example, shoppers have swung from intense demand for e-commerce and home furnishings to prioritizing spending on travel and dining away from home.
Costco has remained a staple destination through those shifts, as you can see from several of its most recent operating metrics. Customer traffic was up a blazing 5% worldwide this past quarter, management revealed in a conference call, and rose 2% in the U.S. market. Costco's renewal rate, or the proportion of members who decided to continue paying the annual fee, rose to a record 92.6%.
Sure, part of that success can be tied to inflation, since Costco's price leadership approach makes its value more obvious to consumers when prices are high and rising. But the chain also performed well in 2021 and early 2022, when shoppers weren't as concerned about budgetary constraints.
Costco's sky-high customer loyalty is a sign that the next membership fee increase will likely be accepted by its shoppers. But the broader takeaway is that the company will likely continue to win market share over the next few years, just as it has through most of the past few decades. That dependability is hard to find in most industries, let alone the retailing world. Investors are right to reward that reliability with a premium stock valuation.