Costco thrives as other retailers struggle

We dare you to find someone that dislikes Costco (NASDAQ:COST). Costco has outlasted many threats in the competitive world of retail — even the mighty Amazon.

A company that needs little introduction

Founded in 1976, Costco is a big box retailer known for its membership-only model, low prices and unique retail experiences. Members enjoy a treasure hunt atmosphere, abundant free samples and everyone’s favorite — the Costco food court.

Today, Costco is the second-largest American retailer with steady growth and strong sales:

• Money printer: Costco raked in $141.1B in revenue in 2021, behind only Walmart and Amazon.
• Market beater: $COST soared 51% last year, outperforming the S&P 500.

Last week, Costco raised its dividend from 79 to 90 cents a share, citing strong business performance. But investors may barely notice — with the dividend yield at 0.6%.

What sticks out is Costco’s “super dividend,” a non-recurring one-time dividend paid to shareholders. The previous special dividends were $10 per share (2021) and $7 (2017).

The OG Amazon Prime

While Amazon was learning to walk, Costco was already running 10K marathons. Costco opened its first location in 1983 — charging members a $25 annual membership. Today, it has over 114.8M paying members with a strong ~90% renewal rate.

Amazon’s presence forced many retailers to adapt – but Costco thrived with its business model and mission to provide the “lowest possible prices.”

• Lower prices: Costco canoffer lower prices as it earns most of its profits from its membership.
• Controlling shoplifting: Costco’s shrinkage (i.e., losses to theft) is much lower at 0.1-0.15% — with other retailers seeing 3%+ shrinkage rates.

The key to Costco’s low theft rate? Bulk items, Costco’s membership and receipt checks upon leaving.

With operations in control, Costco is looking for more growth:

1/ Store expansions: Costco plans to open 28 new stores this year (in the US and internationally) — compared to 20 opened in 2021.

2/ E-commerce growth: Costco is doubling the number of locations with pickup lockers – and expanding its Costco Next program — an online program for members.

Investors: Unstoppable inflation meets impenetrable Costco

Costco has handled supply chain issues, labor shortages and inflation better than most.

• Labor shortage: Employees in US stores are already unionized – providing benefits, higher wages, and worker protections.
• Supply chain: Costco’s products are repeatedly purchased in bulk — reducing the need for a complex supply chain.

Costco is better protected from rising wage pressures with higher employee costs already baked in.

UBS analyst Michael Lasser is optimistic, setting his price target at $625 (3% upside from Wednesday’s closing price).

Keep in mind: Costco isn’t cheap compared to other retailers. Its price-to-earnings ratio of 47x makes Costco the second most expensive retail stock behind Amazon.

But Barron’s Michael Bary isn’t worried — praising Costco’s ability to grow its members and keep costs down — despite inflation and economic challenges ahead.