Warehouse retailer Costco Wholesale (NASDAQ: COST) has some of the lowest margins in the business, because the membership fees it charges shoppers allow the company to earn a tidy profit while still passing on incredible savings to its members.
Costco's low prices haven't just benefited customers: shares have walloped the market, returning 11,000% over the past two decades. However, with prices near their all-time high, is the ride over for Costco investors? To answer that, we've compiled a premium research report with in-depth analysis on whether Costco is a buy right now, and why. Today, you can get a sneak peek into this report, and see two key areas for Costco investors to watch.
Costco offers a basic Gold Star membership for households and a Business membership that allows purchase for resale, both for $55 annually, with the option to upgrade to an Executive membership for $110 annually. Executive members enjoy a 2% rewards program on purchases, up to $750 per year (to be spent at Costco, of course), as well as other perks. While Executive members represent only about a third of all members, their heavier purchasing habits mean they account for nearly two-thirds of sales, while their higher membership fees mean they contribute about half of membership fee income.
While Costco has sustained double-digit membership growth for over a decade, as it approaches saturation in its core North American market, the company could still drive earnings through converting more basic members into Executive members. The proportion of Executive members to basic members, particularly in North America, will be a telling indicator of whether Costco is able to convince its members to pay more for its value proposition.
As of October 2012, Costco has 612 warehouses, over 85% of them in the United States and Canada. While Costco does not break out its 67.4 million cardholders by nationality, a straight comparison would indicate that over 57 million people in the U.S. and Canada are currently Costco members. That means that nearly 1 out of every 6 people in Costco's core market is already a customer. While Costco still sees a lot of opportunity left in certain North American markets, such a high penetration rate means that North America alone won't be able to sustain the kind of rapid membership growth the company has grown accustomed to.
Accordingly, the company plans to open over half of its new stores in 2013 outside the United States. Costco would like to enlarge its presence in the United Kingdom, where it already has 22 locations, and Mexico, where it has 32. The biggest potential high-growth area is the developed Pacific Rim, including Australia (currently hosting three locations), Japan (with 13), South Korea (with eight), and Taiwan (with nine).
Investors should keep an eye on international developments not only because they represent the largest addressable growth market, but also because international stores have significantly lower renewal rates than U.S. and Canadian stores. In its core market, Costco has slowly but surely seen renewal rates at its locations creep upward as shoppers recognized the value proposition of Costco's service, but if this trend doesn't hold overseas, the company's growth could be stymied. This is especially important because international stores tend to cost Costco more to open, particularly in densely developed East Asia.
We hope you enjoyed today's sneak peek. Our premium research report also digs deep into the opportunities Costco is looking to exploit, as well as risks the company faces. You'll also find reasons to buy or sell, a look at the company's management team, and the Foolish bottom line on Costco. Best of all, the report keeps investors informed with a full year of analyst updates. To keep reading, just click here to get your copy today.
Fool contributor Daniel Ferry and The Motley Fool own shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.