Lots of retailers do well in the holiday season as Americans open their wallets and dig deep to make sure the tree doesn't look too bare. However, with most companies offering big discounts to lure in shoppers, margins can get a little thin. One company, however, has a strategy so ingenious that slim margins are actually good for business. Warehouse retailer Costco Wholesale (NASDAQ:COST) actually aims not to make a lot of money on sales. How has such a business model given shareholders a market-stomping 11,000% return? 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 learn a little bit about what makes Costco so special.
Costco Wholesale is a national retail chain that aims to sell a high volume of home items, food, apparel, and other consumer goods. That's about where its similarities to big retailers like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) stop. Costco doesn't offer the variety of brands that its big peers do, nor does it have as many locations. In fact, Costco might be more noticeable for what it doesn't have than what it does.
Right away, a shopper notices that Costco doesn't have floor treatments, just concrete slabs. No glossy displays, just the wooden pallets the goods were brought in on. There aren't even sales at Costco. No coupons, discounts, 2-for-1 deals, or holiday specials.
There's also no advertising budget. No television commercials, radio jingles, ads in newspapers, nothing. Lacking, too, are signs. Want to find the toilet paper? Well ... walk around. You'll find it. And maybe a few other great deals you just can't pass up on the way.
Anything else missing? Big price markups. Costco is dedicated to keeping prices low, pushing merchandise costs down from its suppliers, and passing the savings directly to shoppers. But while Costco goes through great lengths to keep prices low for its customers, the inevitable result is low gross margins. How can Costco's customer-driven focus benefit investors, too?
At under 11%, Costco's gross margin looks pretty weak compared to Wal-Mart's 25%, Staples' (NASDAQ:SPLS) 27%, and Target's 30%. Costco is different from other retailers in a lot of ways, and for Costco investors one of the most important things to keep in mind is that high gross margins aren't a good sign. Costco actually aims to keep margins low, so customers will be satisfied that they're getting a valuable service.
And I do mean "service," not "product." A better way to think about Costco's business model is less like a traditional retailer, earning a profit on goods sold, and more like a subscription service, earning a profit on annual member fees that customers pay to shop there. These membership fees made up only 2% of total revenue in 2012, but accounted for 77% of operating income. For the bottom line, Costco's concerns look a lot more like a magazine's than a retailer's: subscriber renewal rates, subscriber growth, and subscription fee increases.
The key to Costco's success is fanatical customer loyalty. Happy shoppers not only directly support shareholder returns by paying membership fees, they also serve as Costco's best advertisers. So far, Costco's stunning 86% renewal rate in 2012, even after a price hike in annual fees, shows that members are happy with Costco.
We hope you enjoyed today's sneak peek. Our premium research report digs deep into the opportunities Costco Wholesale is looking to exploit, as well as the risks the company faces and the leadership team guiding the company forward. You'll also find reasons to buy or sell, a look at the company's management team, and the Foolish bottom line on Costco Wholesale. 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 owns shares of Costco Wholesale. The Motley Fool owns shares of Costco Wholesale and Staples. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.