We receive lots of interesting questions from members of our Inner Circle service. Many zero in on individual stocks, wanting to know whether or not a particular company is a good stock market investment. This week, we answered a question on a stock with a well-known name.
Q: Hi Pat and team: Can you please tell me your take on Costco? Your advice makes for great bedtime reading in our house!
A: Costco Wholesale Corp., symbol COST on Nasdaq (Shares outstanding: 443.6 million; Market cap: $33.2 billion; www.costco.com), owns and operates warehouse-sized stores that sell a wide variety of consumer goods. It also sells merchandise online.
Costco charges its customers an annual membership fee, usually $50 a year, to shop in its stores. It buys most of its inventory directly from manufacturers, which lets it sell these goods for less than traditional retailers. Food accounts for roughly half of its sales.
The company has 581 outlets. Of this total, 425 are in the U.S., 80 in Canada, 22 in the U.K., eight in Japan, seven in South Korea, six in Taiwan and one in Australia. Costco also operates 32 stores in Mexico through a 50/50 joint venture. It gets roughly 25% of its sales and 40% of its earnings from outside the U.S.
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Stock market investment: Costco customers spend more per visit
In the three months ended May 8, 2011, Costco’s revenue rose 16.0%, to $20.6 billion from $17.8 billion a year earlier. Same-store sales rose 12%, mainly because of higher gasoline prices, higher membership fees, more customer visits and an increase in the average amount spent per visit. As well, the lower U.S. dollar pushed up the value of the company’s international sales by $304 million in the latest quarter.
Earnings rose 5.9%, to $324 million from $306 million. The company spent $102 million on share buybacks during the quarter. Because of fewer shares outstanding, earnings per share rose 7.4%, to $0.73 from $0.68.
Costco’s long-term debt of $1.2 billion is a low 3.6% of its market cap. It holds cash of $6.2 billion, or $14.20 a share.
Stock market investment: Costco keeps prices low and renewals high
Costco faces strong competition from discount stores like Wal-Mart, as well as other warehouse-store chains, such as Sam’s Club (which is owned by Wal-Mart) and Baja’s Wholesale Club. That means the company is unlikely to raise its prices as long as its purchasing costs remain low. This hurts Costco’s profit margins, but it helps the retailer hang on to customers. Costco’s member renewal rate is a high 89% in the U.S. and Canada, and 86% on a worldwide basis.
International markets, such as Japan, South Korea, Taiwan and Australia, should provide further growth opportunities for the company. Costco will probably earn $3.31 a share in fiscal 2011. The stock trades at 23.4 times that estimate.
Costco recently raised its quarterly dividend by 17.1%, to $0.24 a share from $0.205. The new annual rate of $0.96 yields 1.2%.
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