Investors Can Only Hope to Contain Costco Wholesale Stock

Dana Blankenhorn

Costco Wholesale (NASDAQ:COST) is the best retail stock besides Amazon (NASDAQ:AMZN). The shares are up almost 22% in the last year, 82% over the last two years and 130% over the last five. It delivers a small, but steady dividend that has doubled over the last five years.

Investors Can Only Hope to Contain Costco Wholesale Stock

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Costco’s reputation as the best place to buy goods in bulk is reflected in its financial statements, where net income usually comes close to the amount it generates in membership fees. The stores are usually running at break-even.

I have owned Costco shares, but sold them a few years ago, thinking they were overpriced. I worried that Costco was running out of places to grow, as young people moved into small city apartments the company doesn’t serve.

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I was wrong. So far in 2019 Costco shareholders have done better than those at Walmart (NYSE:WMT) or even Amazon.

Communist? Or Conservative?

Costco is unique among retailers not just in that it pays its line employees well, but in that it doesn’t overpay managers. Employees are thus more satisfied with their pay and working conditions at Costco than employees at any other company — even those at Apple (NASDAQ:AAPL).

But Costco is also conservative, in the best possible way. It can cost as much as $100 million to outfit a new store, so it usually rolls out just one or two each month. Its stores are all located in upper-middle class suburbs, with ample parking, gas stations and tire centers. It is the last great suburban success story. Unlike Walmart, it doesn’t suck up the whole retail market, it just skims the cream off its top.

Costco has no secrets. Management admits its focus is on customers and employees, not just shareholders. Its stock is limited to a few items in each category, and its markups average just 15%, against 25-50% markups from other retailers. The company’s Kirkland store brand often offers better quality than the national brands it competes with. Costco was late to online shopping, but its app is already considered better than that of Walmart’s Sam’s Club.

During the era of President Donald Trump, which has benefitted upper-income suburbanites most, Costco’s growth has accelerated. Sales for the first three quarters of 2019 are up 6.5% overall, and online sales are up almost 25%. During the current fiscal year, it has paid back over one-quarter of its long-term debt, nearly $1.7 billion, despite super-low interest rates.

Can Costco Stock Continue?

There are indications that finally, Costco is running out of growth. Neighborhoods and local governments are fighting new stores in some wealthy neighborhoods.

Costco’s profits accelerated after it switched from using an American Express (NYSE:AXP) to a Citicorp (NYSE:C) by Visa (NYSE:V) card, as did benefits to cardholders. But that’s a trick that is hard to repeat.

Costco is growing internationally and opened its first store in Shanghai this month. Currently 68% of its stores are in the U.S., but that will change as it rolls out executive memberships in South Korea, Japan and Taiwan.

Costco’s growth has been decelerating slowly in 2019, into the mid-single digits each month, as its fiscal 2018 revenue came to $141 billion.

The Bottom Line on COST Stock

Costco stock is an investment, not a trade. Costco is managed conservatively for the long run. Even if the stores look cookie-cutter, they don’t open until after years of careful planning. Risks are growing. A higher international profile means there are now currency risks, trade risks and social dislocation risks. Even Walmart has had its misadventures in growing globally.

But, as I said at the outset, I was a fool to sell my shares. Hang on to yours.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear , available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and AAPL.

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