Costco (NASDAQ:COST) has delivered impressive gains for investors over the long-term. Shares of the discount retailer are up by almost 240% in the last decade. Even better, there are solid reasons to believe that Costco still offers attractive upside potential in the years ahead.
A top-quality player
Costco is the pioneer in the warehouse retail business model. The company makes most of its profits from membership fees, not margins on its products. This allows Costco to sell its goods for razor-thin profit margins, sometimes even taking a loss on a particular item. Needless to say, cost leadership is a huge source of competitive advantage for discount retailers.
Costco is remarkably disciplined when it comes to cost savings, particularly in areas such as marketing and advertising, where many competitors typically spend considerable resources. The company also applies smart supply chain strategies, such as purchasing merchandise directly from manufacturers, and storing inventory on sales floors as opposed to using a central warehouse.
On the other hand, Costco is well known for paying higher salaries than the competition, and it offers superior benefits and opportunities for professional development. This is quite unique in an industry in which most players are typically criticized for paying insufficiently low wages, and it provides Costco with a considerable edge in this area.
Attracting and retaining the best human resources in the business is a key source of differentiation for Costco, because it means superior customer service and material cost savings in areas such as employee turnover. A more motivated workforce is also a more efficient and productive one, and this can have a huge positive impact on overall business performance over the long-term.
Customers love Costco
Customers seem more than pleased with Costco's smart business strategy and customer-centric focus. The company has ranked in the leading position among its industry in the American Customer Satisfaction Index each year for more than a decade. Based on data for the 2014 ranking, the company has a satisfaction score of 84 versus an industry average of 79.
The company is building a big and loyal customer base -- Costco ended the last quarter with 43.7 million member households across its different membership levels, up from 43.2 million members in the previous quarter.
Renewal rates have traditionally been above 85%, and they remain as high as ever based on data from the latest earnings report. Worldwide renewal rates came in above 88% last quarter, while renewal rates in the U.S. and Canada were at a staggering 91%.
Rock-solid financial performance
Unsurprisingly, happy employees and happy customers are making investors in Costco smile, too. The company has an impressive track record of revenue growth and cash flow generation over the years. Since profits depend mostly on membership fees as opposed to product sales, this makes earnings and cash flows much more stable and predictable.
The company reported fiscal fourth quarter earnings on Tuesday, and performance looks remarkably healthy when leaving aside external variables such as foreign currency fluctuations and declining fuel prices. Adjusted global comparable sales during the 16-week period ended on August 30 grew 6% year-over-year, and adjusted sales growth over the year was an even stronger 7%.
Costco opened 13 new stores during the quarter, ending the period with a total of 686 warehouses globally. This includes 480 units in the United States and Puerto Rico, 89 in Canada, 36 in Mexico, 27 in the United Kingdom, 23 in Japan, 12 in Korea, 11 in Taiwan, seven in Australia and one in Spain. The company is planning to open 12 new warehouses in the coming quarter.
Importantly, the business still offers substantial room for expansion. Management believes Costco has enough room for nearly 1,000 warehouses in the U.S. alone, and the company is barely taking its first steps in international markets. If Costco can replicate around the world the level of success it has achieved in the U.S., this should power sustained growth for years to come.
Costco's impressive long-term performance is grounded by the company's smart business model and unique culture which has produced sky-high customer satisfaction. As long as Costco keeps giving customers what they want, it makes sense to expect investors in the company to be well rewarded, too.