3 Reasons to Buy Costco Wholesale Stock
Costco (NASDAQ: COST) has been a model of stability in a largely unstable retail environment.
The company has shown steady growth at a time when traditional brick-and-mortar chains have lost business to online retailers. That’s because even though shopping at the wholesaler may not always be as cheap as shopping on Amazon (NASDAQ: AMZN), the warehouse club offers a steady value, a shopping experience its customers enjoy, and a number of other perks that keep members on board.
Costco may not be forever immune to Amazon and other online retailers stealing its customers, but it has shown that its business won’t be disrupted by digital competitors anytime soon. That resiliency and long-term success in and of themselves make Costco shares a buy, but there are three other key reasons why it’s a smart move to acquire shares of the company’s stock.
Costco has done well against increased competition from Amazon. Image source: author.
Lower inventory, higher sales
Costco increased its full-year sales for its fiscal 2016 by 2%, to $116.07 billion, up from $113.67 billion last year. It also saw comparable-store sales rise by 3% in the United States and 4% companywide, adjusted for the effect of lower gas prices.
Those numbers are more impressive when you consider that the chain was also able to lower its inventory per store. CFO Richard Galanti explained that change in the company’s earnings call.
In terms of average inventory per warehouse, last year [at] fourth quarter end, it stood at exactly $13 million per warehouse. This year, it came in at just slightly over $12.5 million or about $460,000 lower or 3% lower. And really lower warehouse inventory is pretty much spread across many categories, including the impact of deflation in many of the food and fresh departments as well as electronics.
Membership remains strong
Costco makes about 75% of its total revenue from membership sales, and those were very strong in Q4. The company reported a 6% increase in membership revenue, to $83 million.
“We continue to enjoy strong renewal rates, 90% in the U.S. and Canada and 88% worldwide, continuing increasing penetration of executive memberships as well,” said Galanti. “In terms of number of members at fourth quarter and year end, at year end, we had 36.8 million Gold Star members, up from 36.2 million 16 weeks earlier at the end of the third quarter.”
In addition, Primary Business members inched up from to 7.3 million from 7.2 million in Q3, and across all categories total memberships increased to 47.6 million member households at Q4’s close, compared with 46.9 million at the end of Q3. Overall, the number of people carrying a Costco card of some sort has increased to 86.7 million at year-end, up from 85.5 million 16 weeks earlier.
The new credit card is working
The warehouse club completed a difficult switch from its longtime credit card provider, American Express, to Visa on June 20. The early days of that change were messy, in part because the old cards worked on June 19 and were completely useless the next day, and partly because the company stopped taking American Express altogether.
Galanti acknowledged that the change was not easy but said the problems were behind the company. He also said that the new cards should be very popular with members because of improvements to the rewards offered.
“The estimate is about a 40% to 50% improvement in the reward program, which is already previously a very good reward program to the members using the Citi Visa Anywhere card,” the CFO said. “And it’s also great for us in terms of driving member value and sales over the next years and of course lowering our effective costs of accepting credit and debit cards.”
In the 14 weeks after the launch, Galanti said, over 1.1 million members have applied for the new card with over 730,000 being activated. Those numbers, he added, “are beating our initial expectations in terms of conversion, usage and new sign-ups to the card.”
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Daniel Kline has no position in any stocks mentioned. He does not care for Christmas music. The Motley Fool owns shares of and recommends Amazon.com, Costco Wholesale, and Visa. The Motley Fool recommends American Express. 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.