Costco Wholesale Corporation (COST)

Great company and they run fabulous operations. However, consumer spending in the US has not been what people have been expecting. Retail stocks have all been stellar performers, but in anticipation of the consumer spending that hasn’t come. In the near term this is probably vulnerable, along with other retailers, to a correction.

An interesting business. They actually carry much less items for sale than other grocery stores or retailers. It targets a particular market, which tends to range on the higher end of household income. As a result, they are able to price their items a little more aggressively in some areas. However, when you aggregate everything together, their prices are actually lower. Valuation is very high, but it is a very good business.

This is still a good growth story. They continue to expand and are going to go more global. Have a great business model. Another advantage they have is with the strong US$, which is impacting negatively a lot of exporting companies. But as a buyer of international goods, those costs are coming down. Valuation of US retailers is quite high right now. Trading at almost 29X estimated earnings.

The company has done a wonderful job. He likes the model. They are in a low margin business, but they have the membership fees, which is pure gravy. A nice recurring revenue. However, the multiple is quite high, which has made him shy away. He doesn’t think you can build in any multiple expansion, so it is going to have to be on internal or organic growth.

One of the best retailing operators, probably that ever existed. The stock is premium priced, trading at about 28X earnings and growing at about 11%. It doesn’t fit with his mold. He would wait for big drops in the stock because of a stumble or short-term blunder.

Their business model is somewhat unique in that they are the low cost leaders. The downside of that is that margins are half of their competitors. If the economy starts to slow down, this company doesn’t have the ability to cut prices to move inventory. The only way you can run a model with low margins, is to be moving a lot of units. If we are expecting an economic slowdown, this company will not have the ability to cut prices. Opened about 30 stores last year and are projecting to do the same this year. These store openings will have a little bit of weight on their expenditures, so some of their cash will be used there. Until these are done, there won’t be any major uptick.

Has been able to maintain its PE multiple over time. One of the few. They want you to look around within the store. This increases the ticket items. You keep adding to the basket. The number of items are in a short list, but they are the go to names. They sell at a discount and members respect this. It is rich, but deserves to be relative to other providers. They have the gas and auto add-on businesses. He would wait for it to cool off a bit to pick it up.

One of the few things in retail that does not have to compete against Wal-Mart. It is at 24 times earnings, but the visibility of forward earnings is orders of magnitude higher.

Whenever we have an experience with something we tend to use that to judge the future. You may not want to pay double what you paid for Costco last time, but if their earnings have doubled then it may be warranted. Costco will respond well to earnings. It is selling to $90k income customers average and their memberships are a recurring revenue. It is trading at about 180% of the S&P multiple so if things go bad, high multiple stocks have a lot of air under them.

He is comfortable owning it. Doing the best of the all the big box retainers. Cater to a more affluent customer base. Profit margins are picking up. They are narrow in what they offer so they are highly efficient in their operations.

This is a company that he loves. Average mark-up is about 14%. Treats employees really well and they stay for long periods of time. Longer-term, this bodes really well when you’ve got the old employees and treat them fairly. Stock price has moved up quite a bit so it is not his kind of a stock.

How do you classify this, consumer staple or consumer discretionary? Also, why has it gained a few percentage points more in total return than Wal-Mart (WMT-N) given that it has a much, much higher P/E ratio? The difference between these 2 is that Wal-Mart tends to be at the lower and of the demographic scale. Also, Costco is a membership driven situation where Wal-Mart is not. Also, there are differences in the types of companies they are. Well managed company and has a good model but a little too expensive for him.

This is a great model. They basically use the membership fees as 100% of their profitability and they have 90% renewal rate. The only thing he worries about is its valuation. Trading at 27X current earnings and 25X forward earnings. Too rich for him. With the growth rates they have, he would want to get in at under 20X earnings.

Still growing. This is the preferred one over a Wal-Mart because they are doing business the right way. Likes their business model where they are trying to support growth in the economy. He would prefer it around $105-$110 range. If you are a first-time buyer, buy one half position today and then watch to see what happens in the market. Trading at roughly 20X earnings.

Wal-Mart or Cosco? Cosco turns over inventory 12 times per year. Prefers over Wal-Mart.