Costco Wholesale Corporation (NASDAQ:COST), the Washington-based warehouse club, has developed a cult following in the U.S. as well as international markets with its deep discounts, treasure hunt atmosphere, and limited but superior quality merchandise. In fiscal year 2014, its total revenue crossed $110 billion. Meat sales alone amounted to $5.9 billion. It sold more than 5 million of its in-house Kirkland Signature branded dress shirts and 120 million hot dog & soda combos in its food courts.
The loyalty it enjoys is evident from the fact that 91% of club members renewed their subscription in fiscal year 2014 in the U.S. and Canada. Globally, 87% of members renewed. Costco has become a craze among buyers, but the company is hungry for more. Here's the lowdown on Costco's aggressive growth plans.
Adding new stores to ensure growth
Costco knows that store expansion is a surefire way of reaching out to a greater number of customers. In 2013, Costco said it wants to open 150 new warehouses over the next five years. The U.S. would get 55 new warehouses, while the remaining would be spread between Canada and other international locations. Approximately half of the openings would be in previously un-entered markets. Richard Galanti, executive vice president and CFO, said the aggressive expansion was not just to keep competition at bay, "but simply reflects that we are doing well and we want to ramp up expansion, which is a decision we made two or three years ago."
The plan seems to be on track, as the company has opened 26 new stores in fiscal year 2013, and another 29 in fiscal year 2014, net of closures and relocations. During the period, Costco closed its Acapulco store that was gutted in a hurricane. The new openings took the total count of global Costco stores to 663 as of fiscal year 2014, and contributed to the 7% leap in annual revenue to $110.2 billion.
Fiscal year 2015 will see the launch of 31 new Costco warehouses and four relocations. The lion's share of the spend will go into investments in land and equipment for both new and refurbished warehouses. The remaining will be poured into modernization of information systems, working capital, and operationalizing new warehouses. Costco will fund its capex with cash from operations, its existing cash balance, and short-term investments.
Focus on international expansion
Costco is one of the few retailers not "forced" to grow overseas markets to compensate for falling domestic sales. It is eyeing international expansion as a strategic growth option. In fiscal 2014, the warehouse club saw a healthy 5% comps growth in the U.S. and a healthier 7% comps growth in local currencies outside the country. Over the last few years, Costco has entered several new countries, and at the end of the 2014 fiscal year, it had 88 stores in Canada and 109 in other international locations.
In fiscal 2014, Costco opened three stores in both Canada and Australia, two in both Korea and Japan, and one in the U.K., Mexico, and Spain. The Spain warehouse marked the company's entrance into the country. In the current fiscal year, the company plans to set up 12 international stores.
Costco hasn't announced a store opening in China yet, but it's eyeing the country's booming online shopping market. It has partnered with the Alibaba Group and has set up an online store on Alibaba's Tmall website. The U.S. retailer will offer food, health products, and several Kirkland Signature items. The orders would be fulfilled through U.S. delivery centers. The company's vice president, Jim Murphy, said, "Costco sees tremendous growth opportunities in China, especially in light of Chinese consumers' increasing appetite for imported products."
Spending to get ahead in the game
Costco's set to spread its wings even further. It's already stepped up its capital spending. Until fiscal year 2013, its capex was mostly in the range of $1 billion to $1.5 billion. The 2013 fiscal year marked a big leap as the company increased its spend to $2 billion and maintained this level in fiscal year 2014. Costco is planning another big leap in fiscal year 2015. It plans to increase its capital budget to $2.5 billion to $2.7 billion.
The increased budget factors in higher spending on store remodeling, expansion of ancillary business operations, expansion of cross-stock depot operations, and some upfront expenditure for store openings that will happen in fiscal year 2016.
Historically, Costco has generated superior returns on invested capital -- in fiscal year 2014, it delivered about 13% on invested capital, fairly higher than its 8.64% weighted average cost of capital. So, investors can expect Costco to create more value for them through its new ventures.
Costco enjoys high customer loyalty and has a proven track record of delivering on customer expectations. The company is expanding its empire by adding new stores and entering new markets. The hiked capital expenditure can be seen as a sign of things to come -- a future in which Costco's success touch new heights.