Costco (COST 1.01%) stands out in the retail sector in a number of important ways. It has proven that it is positioned to grow in any market environment. But with a bull market (defined as a 20% advance and a new market high) looking attractively close, the company is worth examining today.
Here are three reasons why Costco should continue to excel in the retail space.
1. Getting bigger and bigger
In 2011, roughly a decade ago, Costco had 592 locations. Of that total, 433 were in the United States, with the rest in Canada (82), Mexico (32), the United Kingdom (22), Japan (11), Taiwan (8), South Korea (7), and Australia (3).
In 2022, the global retail giant had 847 locations. The United States remained the largest market with 583 locations, but the list of foreign markets expanded to include Sweden (1 store), Iceland (1), France (2), Spain (4), China (2), and New Zealand (1). Costco had also expanded in most of the previous countries within its foreign footprint as well. Canada jumped to 107 stores, Mexico to 40, the U.K. hit 29, Japan 31, South Korea 18, Taiwan 14, and Australia 14.
Image source: Getty Images.
Although all of the new markets the company has entered since 2011 probably don't have the growth potential of Canada (how many stores could tiny Iceland really support?), there are a number of new markets that appear to be very big opportunities.
China is probably the biggest example, though large developed economies in France, Spain, and New Zealand are also attractive for continued store count expansion.
In other words, Costco has ample room for continued growth ahead. And, notably, even during the coronavirus pandemic it opened stores, with 13 new locations added in fiscal 2020.
Although the number of new stores probably won't be huge in any single year, slow and steady growth backed by geographic expansion will continue to power Costco no matter what the market environment brings.
2. A great deal
Costco has to compete with other retailers, and does so by working relentlessly to offer its customers low costs. One of the most notable examples of this is the food court's $1.50 hot dog and soda combination, a price that is pretty hard to beat.
But it is something that shows up throughout the store. There are trade-offs, of course, with the company's selection somewhat limited relative to those of many of its peers. But with key leading brands, and similar Costco branded offerings, customers seem to have enough to keep them happy.
The company goes to great lengths to ensure it has low prices. In fact, it has proven that it will drop companies and their products if it can't get the prices it wants.
Just such a high profile fight between Costco and Coca-Cola gained media attention in 2009. With massive and increasing buying power, Costco has a strong hand in such negotiations. And if the retailer is willing to take on a consumer staples giant like Coca-Cola, no supplier is off the table.
One benefit is that happy customers keep returning to the retailer's store.
3. It's all about the members
Points one and two are important for Costco, but they would be important for just about any retailer. Costco's success in expanding and keeping costs low is simply worth noting.
But the real linchpin here is that both are in service of the retailer being able to charge a membership fee to its customers. With a roughly 90% renewal rate, the revenue from membership fees is like an annuity for the company. So every new store increasing the membership income and keeping costs low ensures that renewals remain at high levels.
This is no small issue. In 2022, membership fees accounted for roughly 55% of operating income. Given that there's little cost associated with this revenue, almost all of the membership fee revenue flows through to profits.
In fact, if you move further down the income statement, membership fees accounted for roughly 70% of net income.
Adding new members and keeping them happy pays huge returns for Costco and its shareholders -- the dividend has been increased annually for nearly 20 years, with a compound annual rate of 12% over the past decade.
Getting better and better
The truth is, Costco is the kind of company you'll probably be happy you own in a bear market or a bull market. It has a well-established and successful business model, and there's no reason to expect it to falter anytime soon as long as it sticks to the playbook. A bull market will simply make investors even more attracted to the stock as so-called "animal spirits" rise, which is good for shareholders.
That said, share pullbacks should probably be seen as opportunities to buy what has historically been a premium-priced stock.
