This membership-based retailer is proving resilient when other consumer-facing companies aren’t.
Tuned-in investors probably realize the average consumer is feeling some significant financial strain right now. Coca-Cola reported a rare first-quarter dip in volume sales, for instance, while fast-food chains Restaurant Brands (parent to Burger King) and Yum! Brands both reported declines in last quarter’s same-store sales despite offering several so-called “value” meals. Even discounter Dollar General is struggling to maintain its stores’ revenue, let alone grow their top lines.
Before jumping to any sweeping conclusions about all consumer-facing stocks though, know that a few companies are pushing through this headwind. Costco Wholesale (COST 3.27%) is one of them. Indeed, it’s holding up well enough to justify an investment in the warehouse-based retailer’s stock. Four bullish arguments stand out.
1. It’s a reliable, profitable grower
Costco is a membership-based club retailer. The company charges either $65 or $130 per year (depending on your membership plan) to shop at its 861 discount stores. Although in its early days it mostly offered basic consumer goods in bulk packaging, many of its products are now available in more consumer-friendly, manageably sized bundles. In other words, it’s more like an actual grocery store and general merchandise store than it used to be.
Whatever it is, it works. Not only has the retailer managed to consistently grow its top line for decades now, it’s been able to grow its profits just as well. There’s no reason to believe Costco won’t be able to maintain this growth streak for the next several decades either.
COST Revenue (Quarterly) data by YCharts
2. Costco stores consistently improve foot traffic — and memberships
This persistent progress isn’t just the result of building more and more stores. Once established, each store is able to reliably expand its reach within its geographical market.
The relevant metric is same-store sales growth, or top-line growth for locations that have been up and running for at least a year. This approach, of course, negates any improvement in revenue that’s solely the result of opening a new store.
As for how the company’s done on this front, take a look at the chart below. While the period between early 2020 and late last year was skewed — for better and worse — by the COVID-19 pandemic, things are stabilizing now. The company’s stores here and abroad have produced average sales growth in the ballpark of 4% since the beginning of this year, handily outpacing waning inflation. (Know that most other retailers just aren’t producing anywhere near this sort of same-store sales growth at this time.)
Data source: Costco Wholesale. Chart by author. Sales figures are in billions.
It’s worth adding that membership growth is also outpacing new-store build and population growth. Total paid memberships of 76.2 million as of the end of August is 7.3% above the year-ago tally, but the company’s only operating 3.3% more brick-and-mortar stores than it was then.
3. The stock’s rally has taken a break
Investors keeping tabs on Costco stock will likely know it’s in the habit of making steady — even if sometimes slow — forward progress. That’s not been the case of late, however. Costco shares’ current price near $890 is more or less where it was trading in early July. That’s a rather unusual pause.
But it’s also a buying opportunity. Don’t misread the message. Costco stock is certainly capable of suffering the occasional setback. At some point in the future it could find its way under a price of $890 again. Based on history though, there’s more upside potential than downside risk from here.
4. This is just how consumers shop now
Finally, perhaps the top reason to buy Costco stock like there’s no tomorrow is the simple fact that many (if not most) people now shop the way the retailer sells. That’s from membership-based stores offering real value even if its packaging isn’t always conveniently sized.
This wasn’t always the case. In the early days of club-warehouse retailing these stores didn’t offer everything, and much of what they did offer was sold in inconveniently sized bulk. Consumers were also taken aback by the idea of paying for the privilege of shopping in a particular store.
Things are different now, however, for a couple of related reasons. One of these reasons is simply that consumers are now accustomed to paying monthly or yearly fees for a range of services. Netflix and Amazon Prime come to mind, as do Peloton Interactive and even some credit cards. This psychological fee hurdle is now much easier to clear.
The other reason 76.2 million people don’t mind paying an annual fee for access to Costco’s stores is that Costco caters to how cost-conscious consumers think and shop now. They’re price-savvy, as well as willing and able to adapt to Costco’s bulk-sized packaging. Perhaps more than anything though, shoppers now have access to technology and data allowing them to find the best possible deal. That often ends up being Costco, giving it a competitive advantage against a backdrop of evolving consumer behavior.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has positions in Coca-Cola. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Peloton Interactive. The Motley Fool recommends Restaurant Brands International. The Motley Fool has a disclosure policy.
