Costco (NASDAQ:COST) continues to be a dominant player in the membership warehouse arena. Its commitment to its members and low prices has remained steadfast since it opened its first warehouse in September 1983.
Here are seven reasons why you should add Costco to your portfolio:
1. The membership warehouse giant currently provides high quality and low-priced products—including its own Kirkland Signature brand—to its members in over 652 warehouses in eight countries, and has plans to open 28 more warehouses in 2014. Costco's expansion will nearly double the number of warehouses in Australia (from five to nine) and its new warehouse in Seville, Spain, will offer an advantageous entry point into Europe. Each new warehouse accounts for around $100 million in new annual revenue and brings new members into the fold.
2. Membership loyalty is an essential component to Costco's business model. In 2013, Costco had a membership renewal rate of over 86% worldwide, even with a potentially dissuading 10% membership fee increase.
3. At a current price/sales ratio of 0.47, Costco trades at a discount (a price/sales ratio of below 1.0 indicates a stock price that is undervalued and might be worth a buy). Costco is even trading at more of a discount than its competitor Wal-Mart (NYSE:WMT), which operates Sam's Club, and has a price/sales ratio of 0.54. .
4. In April, Costco reported same-store sales were up 5% as compared to 2013. Costco still reports same-store sales on a monthly basis for the benefit of its investors even though most retailers have abandoned the once mainstream monthly report. For investors, the positive update in April will likely hasten any negative impact from the polar vortex in Costco's upcoming quarterly report on May 29. Such a negative impact from the harsh winter was recently experienced by Costco's competitor, Wal-Mart, when the company reported first quarter results.
5. Part of Costco's code of ethics is to respect its suppliers. By having direct relationships with several name brand merchandisers, Costco is able to maintain a consistent product base of approximately 3,700 active stock-keeping units per warehouse. This means members will return for both choice and predictability and, more importantly, renew their memberships.
6. Costco has increased its dividend on an annual basis since it first rewarded investors in May 2004— including during the great recession. The company even paid a one-time dividend of $7 in December 2012. Costco also currently has a $4.6 billion cash position, which should certainly give some level of comfort to investors.
7. Costco is also committed to taking care of its employees through its code of ethics. In the United States, Costco has seven store-wide holidays a year and provides its employees with higher-than-average wages. This soft variable has a hard line impact because it reduces employee turnover.
Since Costco has several categories of retail goods—from fresh food to large appliances—it faces competition across the board from general merchandisers (i.e. Wal-Mart or Target) to single category merchandisers (i.e. Staples or Kroger). Costco also faces competition from privately owned BJ's Wholesale Club and has already lost significant potential market opportunity in Latin America and the Caribbean to PriceSmart
However, in comparison to its main competitor, Wal-Mart, Costco looks more promising for revenue growth—at least in the membership warehouse arena. In 2013, for example, net sales from Sam's Club were $57.15 billion, not even 53% of Costco's net sales of $107.89 billion. The difference in sales is significant as Costco and Wal-Mart operate a similar number of locations—652 Costco warehouses versus 632 Sam's Clubs—of similar sizes. And while Costco does have an advantage of 9,000 more square feet on average per store, they are more than outpacing Sam's Club.
Costco's real strength, however, is its 71.2 million members, as compared to the 47 million Sam's Club members. Costco's membership fees accounted for $2.28 billion in income or approximately 75% of its pre-tax income of $3.05 billion.
Costco will continue to thrive on its membership-based business model and has the potential for worldwide growth. It has an unparalleled commitment to its members, employees, suppliers, and investors and its products are on point for consumption. Investors should consider buying shares at the current attractive valuation for a long-term hold as Costco's stock has lagged behind the market over the past year and is overdue for a change of pace.
Spencer Naake owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of 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.
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