This Company Definitely Deserves a Place in Your Portfolio
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Consumers are the heart and soul of any business. But with the prevailing economic uncertainty, consumers have become highly budget conscious and increasingly calculative about their spending. This is leading retailers to keep strategizing in order to pull more and more customers. However, the problem does not end here. Cost inflation is making the situation even more difficult. In such a situation it is very difficult to expect consumers to pay an additional membership fee to shop at some of the warehouse retailers such as Costco Wholesale Corporation (NASDAQ: COST).
The retailer offers a wide range of merchandise at increasingly low prices to its members. In fact, it raised its membership fee a few months ago. In spite of these deterrents the grocer has posted a blockbuster quarter, making investors super excited. Let’s dig deeper.
Analyzing the Potentials…
By keeping the prices increasingly low and providing great service at its warehouses, Costco has won the hearts of its customers. In a weak economic environment, Costco provides what exactly the customers want even if it means buying in bulk. Costco manages to do this by buying directly from the manufacturers at a bargaining price and selling them at very thin margins. Moreover, its business model is such that it earns a lot from its membership revenue with an excellent renewal rate of 90% and additional customers in each period.
Owing to the reasons above and an increase in the membership fee Costco registered revenue growth of 14% to 32.2 billion. In spite of increasing product costs and high gas prices the company witnessed a whopping increase of 29% in its earnings per share over last year.
A remarkable contributor to its top line was the company’s international operations which have grown to almost 30% of its revenue universe. Costco has a wide geographic footprint and it is planning to expand it further by opening most of its new stores outside the United States.
Online operations have also been growing. E-commerce sales rose 14% over last year’s quarter and look pretty attractive. The company is planning to expand further with heavy promotions owing to customers’ large interests in online shopping and lesser costs associated with it.
Defeating the Rivals…
Costco faces stiff competition from Wal-Mart (NYSE: WMT), especially Sam’s Club. Even Wal-Mart is facing difficulties in maintaining its margins. In fact, Wal-Mart is also expanding its footprint in Japan where it has a much larger presence than Costco. However, Wal-Mart has really struggled to have a slice of Japan’s market share whereas the journey was much smoother for Costco.
However, Costco has been a winner when it comes to generating revenue through a large scale offering at much lower prices. This is clearly evident in the chart below which shows one year quarterly revenue growth of Costco, Wal-Mart and Target (NYSE: TGT):
Clearly, Costco has been able to make the most of the tough economic environment and consumers’ restrained spending. With a revenue increase of 14.3% the warehouse retailer has managed to outperform its competitors.
For Target, the market has been comparatively limited since it has a smaller geographical presence as compared to Costco. It operates primarily in the U.S. with a growing presence in Canada. Moreover, it has other shortcomings such as lack of bulk purchase business model where Costco specializes. Target also fails on the pricing front. Its prices are not as low as Costco or Wal-Mart which makes it less attractive to budget-conscious shoppers except for some seasonal discounts during some parts of the year.
With a 43.6% return to its investors in the last one year, this company seems to have a great future. It has a great pricing advantage and huge customer demand. Its hike in membership fees worked perfectly well, helping it endure the effects of cost inflation. Additionally, it has huge demand on an international basis and its efforts to cash in on the situation are commendable. Costco’s increased focus on E-commerce business looks beneficial going forward. With a remarkable performance as against its peers Costco looks like the right investment for a prudent investor.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.