costcoRevenue and earnings figures for the third quarter of fiscal 2023 (ending May 7) (COST 0.05%) may have disappointed Wall Street analysts, but it’s still a good business. It has a loyal customer base and a strong economic base. And the shares have turned out to be amazing investments, gaining 148% over the past five years.
You might want to add Costco to your portfolio now, even if it’s underperformed S&P 500 over the past 12 months. But before buying you have to deepen your understanding about the company.
Here are three things the smartest investors know about this top retail stock.
1. Unique Business Model
With 852 warehouses spread across the globe (mostly in the US), Costco isn’t that different from a typical big-box retailer. It sells a wide range of popular branded and private-label products at low prices, and has an e-commerce presence.
But Costco’s uniqueness is that it operates a membership-based model. Only customers who pay an annual fee for Gold ($60) or Executive Membership ($120) can step inside the warehouse to make a purchase. This gives Costco a high-margin and recurring source of revenue, as well as driving customer interest. Members certainly see value in this offering, as renewal rates around the world consistently hover around 90% on a quarterly basis.
All of this helps support Costco’s cost advantage, which is a major source of its economic moat. Its ability to negotiate better terms with suppliers, who have no choice but to do business with the world’s third largest retailer, translates to lower prices for members. And that helps bring in more members, resulting in more sales for Costco and better profits for suppliers as well. This favorable position makes it difficult for smaller rivals to compete.
2. Reliable development
Between fiscal 2017 and fiscal 2022, Costco’s total revenue grew at a compound annual rate of approximately 12%. And there wasn’t a single year when annual revenue growth was less than 7.9%, which happened in fiscal 2019. These are remarkably stable gains that are all the more impressive when you consider that the past few years included global pandemics, supply chain issues. and historically high levels of inflation.
Although, to be clear, Costco is currently experiencing a bit of a recession. Its total sales grew just 2% year over year in the latest fiscal quarter (the third quarter of 2023 ending May 7), while same-store sales rose a modest 0.3%. We’re seeing similar trends at other big retailers, too, so Costco shareholders shouldn’t panic.
Looking to the future, Costco looks set to continue its long-term expansion. The business plans to open 23 net new warehouses in this financial year. Ten of these will be outside the US and, by the end of fiscal 2023, there will be six Costco stores in China, which the country management sees as a meaningful international growth driver in the future.
3. Stiff Competition
While Costco’s particular business model and steady growth are important aspects of the story, investors should also be aware of things going on in the overall industry. The retail sector is notorious for being extremely competitive, and Costco will have to find ways to successfully move forward in this environment.
walmart That’s probably Costco’s biggest competition, especially with its Sam’s Club stores. Sam’s Club membership numbers set a record in the most recent fiscal quarter. And Walmart raised full-year guidance thanks to a strong performance in the most recent quarter. Because it is by far the largest grocery retailer in the country, it is well positioned to do well despite increasing consumer budgets.
As e-commerce shopping becomes more popular, Costco faces stiff competition Amazon, The tech giant’s Prime membership, which has over 200 million members, is a viable alternative to getting a Costco membership. an analyst from JPMorgan Chase It was recently said that Amazon could become the largest retail business in the US in the next year, showing just how influential it has become. Costco has to do whatever it can to maintain its industry standing.
JPMorgan Chase, a Motley Fool company, is an advertising partner of The Ascent. John McKay, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s board of directors. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has posts at and recommends Amazon.com, Costco Wholesale, JPMorgan Chase, and Walmart. The Motley Fool has a disclosure policy.
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