Costco Wholesale Corp. (Nasdaq: COST) is the holiday retail winner

January 4, 2007 on 10:24 am | In Long Term Picks |

  • Buy COST under $54
  • Sell COST at $100

Today, Costco posted a 9% increase in same store sales for the holiday period. This comes at the same time that competitor BJ’s Wholesale Club posted disappointing holiday sales and slashed it’s forth quarter forecast. Wal-Mart and its Sam’s Club operating unit also disappointed with a meager 1.6% year over year gain for December sales. At Wall Street Mayhem we believe that Costco’s stellar results were largely overlooked due to tepid overall retail numbers. Therefore, now is a good time to buy Costco.

The corporate culture at Costco is nothing short of outstanding. Employees are well paid, get excellent benefits, and are more efficient than those at Wal-Mart. Although long suspected, this increase in efficiency due to higher pay and better working conditions was quantified by Business Week a few years back http://www.businessweek.com/magazine/content/04_15/b3878084_mz021.htm. These efficiencies translate directly to the bottom line as can be seen by looking at Costco’s selling, general, and administrative costs (SG&A). SG&A at Costco totals a tiny 9.5% of revenue, compared to an industry average over 20%.

The increased efficiencies and happy employees at Costco help contribute to a significantly better consumer experience in Costco stores than in stores of competitors like Sam’s and BJ’s. Costco stores are clean, the employees are friendly, and the checkout process is efficient. Price’s are about the same in Costco, Sam’s, and BJ’s for similar items, but Costco carries more high end items and a better selection of organic and healthy foods. These higher end products are in demand (see Whole Foods post http://wmayhem.com/?p=24) and they typically have slightly higher margins.

Costco is a virtual case study on the importance of treating employees well. Although some short sighted analysts have said that Costco pays their employees too much, the increased efficiencies and steady growth in revenue and profits prove otherwise. Although retail is currently out of favor, Wall Street Mayhem thinks this situation has created an excellent buying opportunity for Costco.

Shares of Costco trade at a current P/E of about 23 and a forward P/E around 18. Although these multiples are higher than competitors Wal-Mart (P/E 18), Target (P/E 19), and BJ’s Wholesale (P/E 18), Wall Street Mayhem thinks that Costco is still undervalued. Costco shares are a classic example of the old saying “you get what you pay for”. Costco is a best of breed company that continually outperforms its peers. Therefore, Costco will always have a higher P/E ratio than Sam’s and BJ’s.

17 Comments »

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  1. I shop at Costco every week. I amazes me how much better Costco is than Sam’s. The prices are about the same, but the store is cleaner, the products are better quality and the people are nicer. I’m buying, but I still like Ebay better overall.

    Comment by Alex — January 28, 2007 #

  2. Costco is still exhibiting strenght compared to other retailors. I really like the regonalization of product offerings. This is something that Costco is great at while competitors like Sam’s can’t seem to figure it out at all.

    Comment by Jerry — February 27, 2007 #

  3. From an investment standpoint I have never liked Costco’s stance on returns. Until a few days ago a customer could buy a new plasma TV, use for a year, then simply return it! Costco has finally fixed this problem by instituting a 90 day return policy on electronics. Here is a link to an article on WSJ that details the new policy:
    http://online.wsj.com/article/.....p;ru=yahoo

    Comment by Julie Karagina — February 27, 2007 #

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