The current state of Costco, should I enter or not?

Costco Wholesale Corporation (stock symbol: COST) is a globally renowned membership-based retailer known for its low prices and high-quality products. In comparison to other retailers, Costco places special emphasis on the satisfaction of three main groups: customers, employees, and shareholders.

From a financial and stock market perspective, Costco’s stock performance over the past decade (2013 to 2023) has been outstanding. During this period, its stock price has grown fivefold, surpassing competitors such as Walmart, Target, and Carrefour. Walmart, in the same timeframe, experienced only a twofold increase in stock price, highlighting Costco’s strong performance in the capital market.

In summary, Costco not only excels in customer and shareholder satisfaction but also distinguishes itself in employee satisfaction and benefits, showcasing its unique corporate culture and values. This sets Costco apart in the global retail market.

Today, I’ll take everyone to analyze Costco, the company, and why it leads in the industry, as well as identifying the best time to enter!

Costco’s Unique Model

Costco is synonymous with bulk retailing, utilizing a distinctive membership-based model that sets it apart in the retail industry. The core of Costco’s success lies in its commitment to providing value for its members. By charging an annual fee, Costco can offer products at significantly lower prices compared to traditional retail stores. This strategy not only enhances customer loyalty but also ensures a consistent stream of revenue.

Costco’s Product Strategy

The key factor in Costco’s business model is its product selection. In contrast to traditional retailers, the company focuses on a limited number of stock-keeping units (SKUs). This strategy not only simplifies inventory management but also allows for bulk purchasing discounts, which Costco passes on to its members. The company’s commitment to quality, even in its Kirkland Signature brand, reinforces customer trust and loyalty.

However, what truly sets Costco apart is its bulk sales approach. Selling products in large quantities can save customers expenses, creating an economical and efficient shopping experience. This model has proven to be particularly resilient, maintaining strong performance even during economic downturns.

Entering Costco – The Best Time

Analyzing Costco’s historical stock performance, particularly during periods of economic uncertainty, can provide insights into the best entry points. Additionally, keeping an eye on market trends, consumer behavior, and any significant company announcements can help identify favorable moments to enter the market.

Remember, investing always involves risks, and it’s advisable to conduct thorough research or consult with financial experts before making any investment decisions.

Customer Loyalty

A crucial component of Costco’s success is its astonishingly high membership renewal rate, driven by the company’s unwavering focus on customer satisfaction. Costco’s ability to provide high-quality products at lower prices, coupled with excellent customer service, has cultivated a loyal customer base. From product selection to store layout, the company’s commitment to putting members first is evident in all aspects of its operations.

Recent Financial Performance:

Costco’s financial performance in the first quarter of the 2024 fiscal year is impressive. The company reported robust sales growth, demonstrating its ability to thrive even in challenging market conditions. This performance validates the advantages of Costco’s business model and efficient operational strategies.

As of December 20, 2023, Costco’s market capitalization is $300.84 billion, with an enterprise value of $292.32 billion. Its trailing twelve months (TTM) price-to-earnings ratio is 46.21, with a forward price-to-earnings ratio of 43.67. The profit margin is 2.65%, and the operating profit margin (TTM) is 3.43%. Costco’s total revenue (TTM) is $245.65 billion, with a net profit (TTM) of $652 million. It holds total cash of $17.86 billion and total debt of $9.35 billion. In the past 52 weeks, the stock price has changed by 47.44%, significantly outperforming the S&P 500’s 22.23% change. Costco’s annualized dividend yield is 4.08%, with a dividend yield of 0.60%.

Growth and Stability:

Costco’s growth trajectory is characterized by sustained and stable expansion. Unlike many competitors, Costco has achieved steady growth without excessive expansion. This cautious approach, focusing on long-term stability rather than short-term gains, has consistently been a key factor in the company’s success.

Profitability and Efficiency

Costco’s profitability is enhanced through its operational efficiency. The company’s business model, centered around bulk sales and low prices, results in relatively lower profit margins. However, Costco compensates for this with high sales volume and efficient cost management. This efficiency extends to its supply chain and logistics, as Costco continuously seeks ways to reduce costs and improve operations.

According to Costco’s financial reports, the net sales for the 17th week of the fourth quarter amounted to $77.43 billion, showing a 9.4% increase from the same period last year, which recorded $70.76 billion. The net sales for the fiscal year 2023, consisting of 53 weeks, totaled $237.71 billion, marking a 6.7% increase from the fiscal year 2022 with 52 weeks, which recorded $222.73 billion. The net profit for the 17th week of the fourth quarter was $2.16 billion, with diluted earnings per share of $4.86, higher than the same period last year with a net profit of $1.868 billion and earnings per share of $4.20. For the fiscal year 2023, the net profit was $6.292 billion, with diluted earnings per share of $14.16, exceeding the previous year’s figures of $5.844 billion and $13.14 per share, respectively.

Stock Performance and Investor Confidence

Costco’s stock performance reflects its strong financial position. The company’s consistent growth and enhanced profitability have boosted investor confidence, and its robust stock market performance attests to this. Over the years, Costco has demonstrated resilience in the face of economic challenges, further solidifying its position as a stable investment.

Special Dividend Announcement

On December 14th, Costco announced a special dividend of $15 per share to be distributed to shareholders registered as of December 28, 2023. This announcement clearly indicates Costco’s strong financial condition and commitment to rewarding shareholders.

Insights for Investors

The announcement of this special dividend reflects Costco’s robust cash flow and financial stability. It highlights the company’s ability to generate excess cash, which can be returned to shareholders, a sign of a healthy and thriving business. For investors, this is an encouraging signal, indicating that Costco is not only growing but also prudently managing its finances.

However, it’s important to note that Costco’s stock recently broke through the $600 resistance level, reaching an all-time high, raising concerns about the possibility of the stock being overvalued. Additionally, there is a possibility that Costco may announce an increase in its membership fees, which typically occurs every six years, along with the possibility of special dividends. Costco’s business model focuses on membership fees and high renewal rates, making it a long-term investment opportunity.

Historical Background

Costco has a history of paying special dividends, providing additional motivation for investors. In addition to regular dividends, these occasional payouts underscore Costco’s emphasis on shareholder value. It’s worth noting that special dividends are not guaranteed but announced based on the company’s financial performance. Thus, they demonstrate Costco’s strong financial condition.

The announcement of the special dividend also illustrates Costco’s capital allocation strategy, showing the company’s commitment to maintaining a strong balance sheet while returning value to shareholders. Faced with such significant positive developments, Costco appears to be a worthwhile investment, whether for long-term strategies or short-term returns in the form of special dividends.

Costco’s Growth Strategy and Future Outlook

Expansion Plans:

Costco’s expansion strategy is a key advantage. The company has consistently been increasing its number of warehouses both in the United States and internationally. This expansion involves not only adding new stores but also strategic placement, ensuring that new stores are located in areas with high growth potential.

Digital Transformation:

In the era of digital commerce, Costco has not been left behind. The company has been actively strengthening its digital business, enhancing its online shopping platform, and integrating technology into its operations. This digital transformation is crucial for meeting the ever-changing shopping habits of consumers and maintaining competitiveness in the retail industry.

Market Trends:

Looking ahead, several market trends may impact Costco’s growth. The increasing focus on e-commerce, evolving consumer preferences, and the global economic landscape are all factors that position Costco favorably. The company’s adaptability and customer-centric approach will be key in leveraging these trends for sustained growth.

Long-term Vision:

Costco’s long-term vision encompasses not only expanding its physical footprint but also strengthening its position in the retail sector through innovation and customer engagement. The company’s investments in technology, focus on customer experience, and commitment to sustainability are all part of this vision. Costco’s goal is not only to be a leader in the retail industry but also to be a model of responsible and sustainable business practices.

Analysis and Future Outlook for Costco:

Costco’s current global store count is relatively low, with less than 900 stores, indicating significant growth potential in the future. In the latest financial report, Costco expressed plans to moderately increase its store expansion pace, targeting 25 new stores annually from 2024 to 2028 and aiming for an expansion to 30 new stores per year from 2029 to 2033.

If these new stores can generate similar foot traffic and revenue as the past stores, the company’s profit growth rate could be faster than before. Continuous high growth makes the company deserving of a high price-to-earnings ratio.

According to CNBC analyst statistics, from last year to this year, the company’s EPS increased from 13.14 to 14.16, a growth of 7.7%. Analysts predict that Costco’s estimated EPS for the next year will reach 15.65, with a year-over-year growth rate of over 10%.

Costco’s regular quarterly dividend has been steadily increasing, growing from $0.31 per share in 2013 to the current $1.02 per share. Special dividends, which were $5 per share in 2015, $7 per share in 2017, and $10 per share in 2020, are likely to increase to $12 in 2024.

Costco last increased its membership fees in June 2017, making the current adjustment interval longer. Therefore, public acceptance of this adjustment is likely to be higher. According to reports from Fox News, Costco CFO Richard Galanti stated, “It’s a question of when, not if,” regarding the fee increase. Therefore, I believe that over the next 10 years, Costco’s stock price will continue to rise, making it a sound choice for long-term investors who can consistently invest at regular intervals.

Comparison with the Current Uncertain Economic Outlook:

In contrast to the overall economy, which is still grappling with persistent stagflation and uncertain prospects, Costco (COST) may not promise explosive wealth growth, but it stands out for its stability. Moreover, due to the company’s sustained expansion, its overall growth rate surpasses the market average.

While the company is expected to focus its future growth primarily outside the United States, Costco’s deeply rooted strategy of offering low prices and maintaining excellent service quality is likely to make it the preferred shopping destination in the eyes of consumers.

Therefore, if one lacks confidence in predicting future economic conditions and is reluctant to see funds eroded by inflation, investing a portion of idle funds in solid assets like Costco may be a wise choice. Perhaps, by the time you retire, this investment may bring unimaginable wealth!