But as pandemic restrictions are easing in many regions, and Costco stock trades near all-time highs, is it still a bet for future growth?
The unique success continues
Costco, like most large supermarket chains, typically demonstrates single-digit quarterly sales growth. That changed in 2020 when the pandemic powered higher sales as customers stocked up on essentials, and for the past four quarters, sales have increased by double-digit percentages year over year. In fact, its highest increase came in its most recent reported quarter, the fiscal third quarter ended May 9, with a 22% sales rise year over year. That happened as the economy began to reopen and people focused on nonessentials. Lest you think things may have slowed down dramatically since then, July sales increased 16%.
Costco struggled with supply issues for certain large items such as electric appliances over the past year, and it posted its incredible results with a low supply of expensive items. Some categories, such as travel and optical, were completely closed down for several months. But those trends have reversed with these categories functioning again, so even as essentials restocking slowed down, other sales ramped up.
E-commerce has decelerated as well, but it’s still increasing, up 41% in Q3 and 7% in July. The company upgraded logistics for the e-commerce program, so delivery is faster and cheaper, and profit margins have improved. Costco faced inflationary pressures in Q3. The gross margin was slightly lower year over year. The company said that inflation may impact prices going forward, but so far it’s trying to keep retail prices down. Costco’s margins, generally about 11% to 12%, are lower than those of other retail chains. But it makes up for some of that in customer loyalty, through sheer volume and membership fees.
What the future holds
Costco is, believe it or not, fairly small in terms of store count. As of July, it operates 813 warehouses, with 562 in the U.S. and the rest international. It’s nowhere near saturation, and it has plans to open new warehouses, but it goes pretty slowly in comparison with similar companies. Costco opened 21 net new stores so far in 2021 and is expecting to open 25 in each of the next two fiscal years. The company recently established a footprint in China for the first time, with plans for a second store. Costco is opening up an entirely new and huge market in the Middle Kingdom.
Walmart, by contrast, has almost 5,000 stores just in the U.S., while Target has over 1,900. Costco is the 12th-largest company in the U.S. by sales, far behind Walmart but way ahead of Target, which means each store makes it a lot of money. That’s why it doesn’t need to go on a frantic opening craze, and why investors can expect Costco to pursue careful growth for a very long time.
Costco’s customers are loyal, and retention generally hovers around 90%, plus it adds millions of new customers annually.
Finally, its dividend only yields 0.66%, but Costco has raised the payout annually for the past 14 years and has paid a plush special dividend of between $5 and $10 per share every two or three years since 2013.
My conclusion is that investors shouldn’t worry about buying near all-time highs. Costco can keep delivering growth and gains for investors well into the future.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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