➡️ This is a step-by-step stock review to determine if Costco (COST) stock is a good buy. In this article, we’ll help you understand the company, where the company is going, the competition, and the leadership. This way you can make a more confident investment decision.
Costco is the third largest retailer in the world with over 800 stores in countries including the US, Puerto Rico, Canada, Mexico, Japan, UK, Korea, Taiwan, Australia, Spain, France, China and Iceland. The company was founded in 1983 and headquartered in Issaquah, WA.
Table of Contents
- Step 1: Tykr Rating
- Step 2: Costco Company History
- Step 3: Costco Business Model
- Step 4: Costco News
- Step 5: Costco Competition
- Step 6: Costco 4Ms
- Step 7: Is Costco Stock a Good Buy?
Step 1: Tykr Rating
➡️ Goal: When you look at a stock, the first step is to look at the financials. Fortunately, Tykr does this for us automatically. The higher the score, the stronger the financials and the safer the investment. The higher the MOS, the higher the potential returns you can make.
- Summary: Watch
- Score: 72/100
- MOS: 0%
- Share Price: $499
- Sticker Price: $505
Step 2: Costco Company History
➡️ Goal: It’s important to know the company’s history. This helps us understand the various revenue streams, if they acquired other companies, how they grew through difficult times, and how they separated themselves from the competition
- In 1976, Sol and Robert Price opened Price Club in San Diego and sold products out of old airplane hangars once owned by Howard Hughes. This first store was also known as Costco Warehouse #401, and it’s still open today. Price Club was one of the first retail membership club business models. The model was originally tailored towards small business owners, selling items in bulk for discounts with accessibility only through membership.
- In 1980, Price Club went public and expanded to 24 locations in the Southwest US.
- In 1983, Jim Sinegal and Jeffrey H. Brotman opened Costco in Seattle.
- In 1985, Costco started offering hotdogs in stores for $1.00 and a hotdog and a soda for $1.50. To this day, they have not increased the price of their hotdogs. The objective was to transform Costco from a store into an experience. Bring the entire family in the store and buy products in bulk but before you leave the store, don’t forget to pick up a few hotdogs.
- In 1986, Price Club expanded into Canada and reached over 1 million members.
- In 1992, Price Club expanded to Mexico.
- In 1993, Costco and Price Club agreed to merge operations after Price declined an offer from Walmart to merge with Sam’s Club. Costco’s business model and size were similar to Price Club, which made the merger natural for both companies. The combined company took the name PriceCostco, and memberships became universal, meaning that a Price Club member could use their membership to shop at Costco and vice versa. At this time, PriceCostco had 206 locations and generated $16B in sales. At the time, founders from both companies led the company but in 1994, Sol and Robert Price left the company to form PriceSmart, a warehouse club chain in Central America and the Caribbean, unaffiliated with Costco.
- In 1997, PriceCostco changed its name to Costco.
- In 2012, CNBC premiered the documentary, The Costco Craze: Inside the Warehouse Giant.
- In 2014, Costco became the third largest retailer in the US, behind Walmart and Amazon.
- In 2016, Costco announced that it would open 29 locations that same year, the most the company has opened in a single year.
- In 2019, Costco opened its first warehouse in China.
- In 2019, Costco ranked #14 on the Fortune 500 rankings of the largest US corporations in total revenue.
- In 2020, Costco teamed up with Alibaba to sell products through e-commerce.
- Costco is the first company to grow from $0 to $3B in sales in less than six years.
Step 3: Costco Business Model
How does Costco make money?
➡️ Goal: It’s important to know how a company makes money. A mature business model has multiple streams of revenue which allow the company to weather downturns in the economy.
Costco generates revenue through three primary revenue streams:
- Retail – 91% of Costco’s revenue is generated from in-store purchases.
- Membership Fees – 2% of Costco’s revenue is generated from Membership fees, but membership fees account for 80% of the profit.
- E-commerce sales – 7% of Costco’s revenue is generated from E-commerce sales.
Here is a breakdown of the revenue by country:
- US – 72%
- Canada – 14%
- Other countries – 14%
Regarding memberships, here is a breakdown:
- Executive Membership – $120/year which includes 2% cash back (up to $1,000) and discounts on insurance, pet insurance, home remodeling, generators, solar panels, travel, and more.
- Business Membership – $60/year and allows you to join the affiliate program for $60/year, which pays up to $6 per sale.
- Gold Star Membership – $60/year
Step 4: Costco News
➡️ Goal: It’s important to highlight important company-specific news as well as industry-specific news over the last month and year. We don’t need daily news on a company to make buy or sell decisions because we’re investors, not traders. Overall, we want sufficient news to understand where a company and industry are heading over the next year or few years.
An article from fool.com talks about Costco’s membership model. In 2021, Costco generated $3.9B from over 115 million members, which accounted for 80% of the profit. Here are a few benefits with the membership model.
- Allows Costco to sell products at lower prices.
- Incentivizes customers to keep returning.
- Offers a 2% annual cashback reward on purchases up to $1,000.
- Costco requires you to show your membership card upon entry and check your receipt and purchases upon exit. Overall, the membership model reduces inventory losses due to theft which is common at stores including Walmart and Target.
An article from fool.com lists 3 reasons why Costco is a must-own stock.
- Membership fees – The membership not only increases the profit but also keeps customers coming back.
- Low prices fight inflation – Due to the membership fees, Costco is able to keep its prices lower, especially on food.
- E-commerce is not the focus – Costco knows it’s not an e-commerce powerhouse, and it doesn’t plan to be. Their focus is the brick-and-mortar retail store, and they plan on keeping it that way for now. In other words, if it isn’t broken, don’t fix it.
A video from CNBC states that now is the best time to buy Costco. Some of the stocks listed in this video as strong buys include Microsoft, Apple, and Costco. The video goes on to say that Costco’s membership model gives Costco control over inventory costs and product prices.
An article from foxbusiness.com states that Costco has historically increased its membership fees every 5.5 years. Regarding a membership increase in the near future, CFO Richard Galanti said, “In terms of membership fees and a possible increase, there are no specific plans regarding a fee increase at this time. We’re pleased with our growth in both top-line sales and membership households over the last several quarters and in member loyalty as reflected in increasing member renewal rates.”
An article from fool.com states that Costco currently has a 91% retention rate. When consumers sign up for a Costco membership, they are unlikely to leave. Consumers are finding that shopping at Costco is economical, and at the same time, it’s adding to the net income and EPS, which has been a key driver to increasing the share price.
An article from marketrealist.com talks about the popular Costco hotdog. Within each Costco store, you can buy a hotdog for $1 and a hotdog and a soda for $1.50. Costco sells an estimated 100 million hot dogs per year, which means Costco is generating $100M in revenue from hotdogs alone. As mentioned earlier, the hotdogs are not meant to be a key revenue driver; although $100M a year is impressive, the hotdogs are meant to create a fun family experience.
An article from nytimes.com outlines Sam’s Club membership plans.
- Sam’s Club Plus Membership – $100/year which includes 2% cash back (up to $500).
- Sam’s Club Membership – $45/year
An article from cram.com talks about CEO Craig Jelinek. He is known to be authentic low-key, organization first, and dedicated to his employees. He sets the tone of an organization with high ethics and respect for others. The article mentions that charismatic leaders may get more followers but authentic leaders give more back to others. Overall, they make decisions for the greater good and stand up for what is right. Jelinek was CNN Money Magazines’ top choice CEO in 2015.
For the latest news on this stock, please login to Tykr.
Step 5: Costco Competition
➡️ Goal: It’s important to understand who the competitors are and how their financials rank against this company. Try to find 5 other competitors to rank against based on Score. The best way to find competitors is to Google “XYZ competition” and replace XYZ with the company name. You can also go to Tykr and click on the “Similar Stocks” tab on each stock to see similar companies in the same industry.
Costco (COST)
- Summary: Watch
- Score: 72/100
- MOS: 0%
- Share Price: $499
- Sticker Price: $505
- Revenue: $195B
- Stores: 800
Walmart (WMT)
- Summary: Watch
- Score: 50/100
- MOS: 0%
- Share Price: $130
- Sticker Price: $132
- Revenue: $572B
- Stores: Walmart (10,500) and Sam’s Club (600)
Target (TGT)
- Summary: Watch
- Score: 56/100
- MOS: 0%
- Share Price: $148
- Sticker Price: $150
- Revenue: $106B
- Stores: 1,938
PriceSmart (PSMT)
- Summary: Overpriced
- Score: 44/100
- MOS: 0%
- Share Price: $58
- Sticker Price: $58
- Revenue: $3.6B
- Stores: 47
Step 6: Costco 4Ms
➡️ Goal: All of our homework on this company leads up to the 4M checklist. A lot of investors only look at the numbers. Yes, it’s important to look at the first M (MOS) which is the math part of investing but it’s also important to look past the numbers and also look at the business, the competition, and the management. If all 4Ms pass, we should have high confidence in buying this stock.
❌ MOS: The score of 72/100 is pretty good but the MOS of 0% does not show a lot of upside potential.
✅ Meaning: The membership model has proven to work very well for Costco. Memberships have high-profit margins and drive recurring purchases by consumers. There is also strong brand loyalty with the Costco brand similar to what you find with Apple consumers. Once you become a Costco member, you tend to stay a Costco member.
✅ Moat: The primary competitor to Costo is Sam’s Club, a subsidiary of Walmart. Although Sam’s Club is a membership model as well, they do not have the same brand loyalty as Costco. Sam’s Club’s retention rate is currently 70% which is far lower than Costo’s 91%.
✅ Management: W. Craig Jelinek has served as CEO of Costco since 2012. From 1981 to 1984 he worked at Lucky Stores, In 1984 he joined Costco as a warehouse manager and climbed through the ranks over the next two decades. The Glassdoor rating of Costco is 4.0 and the CEO approval is 85%. Both ratings are outstanding and a reflection of the type of person he is which is a leader who truly cares about his customers and employees.
If you’re interested, you may complete your own 4M checklist on this stock or other stocks by logging into Tykr.
Step 7: Is Costco stock a good buy?
Although the MOS does not look strong at the moment, the other 3Ms look fantastic. This stock is often spoken highly of on the Motley Fool Money podcast and it’s not hard to understand why. This is a well-run company with a strong global footprint. When the market corrects, this stock will most likely generate some nice returns. This may be another long-term stock to consider adding to your portfolio.
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The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
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