Pat McKeough responds to many personal questions about specific stock market advice and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.

This week, one Inner Circle member asked us about one of the best known of the big-box warehouse stores. Low prices and an annual membership fee have helped Costco remain profitable. Pat sums up the company’s financial picture and assesses its ability to continue to compete against intense and increasing competition.

Q: Hi Pat: Thank you for your advice over the years. I would like to know if Costco is a buy, because it seems like customers love shopping there. Thank you.

A: Costco Wholesale Corp. (symbol COST on Nasdaq; www.costco.com) owns and operates warehouse-sized stores that sell a wide variety of consumer goods. It also sells merchandise online.

For some time, Costco has charged its customers an annual membership fee, usually $55 a year, to shop in its stores. Costco has 622 outlets, including 448 in the U.S., 85 in Canada, 32 in Mexico, 23 in the U.K., 13 in Japan, nine in Taiwan, nine in South Korea and three in Australia. It has a 90% member renewal rate.

Costco 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.

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Discount gas stations help push up same-store sales

In its fiscal 2013 first quarter, which ended November 25, 2012, Costco’s revenue rose 9.6%, to $23.2 billion from $21.2 billion a year earlier. Same-store sales rose 7%, mainly because of higher gasoline prices and favourable foreign exchange rates. Costco operates discount gas stations at 60% of its stores. Nearly 30% its customers buy gas and shop on the same trip to the store.

Excluding one-time items, earnings per share rose 18.5%, to $0.96 from $0.81.

Costco’s long-term debt of $1.4 billion is a low 3.2% of its market cap. It holds cash of $5.6 billion, or $12.85 a share.

The company 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).

The company plans to open up to 14 more warehouse stores before its fiscal year ends on September 1, 2013. This includes further expansion into international markets like Japan, South Korea, Taiwan and Australia.

Costco will probably earn $4.50 a share in fiscal 2013. The stock trades at 22.6 times that estimate. The $1.10 dividend yields 1.1%.

In the Inner Circle Q&A, Pat looks at whether Costco can keep its prices low and still remain profitable in its highly competitive industry. He concludes with his clear buy-hold-sell advice on the stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

Noted fund manager and author Peter Lynch talked about the wisdom of “investing in things you see every day.” Do you follow this strategy when it comes to consumer stocks? Do you base your decisions on your family’s own shopping habits? Do you back up your gut instinct with extra research? Has this approach worked out for you? Let us know what you think.