Costco (COST) — Stock Investing Analysis

Earnings; Bulls Say vs. Bears Say; Investment Thesis

Invesdea 💰 Investing Ideas
3 min readSep 29, 2023

📖 Business Facts

🔹 Costco Wholesale, headquartered in Washington, US, specializes in operating membership-only big-box retail stores.

🔹 Membership: Costco operates on a membership-based model. Customers must purchase a membership to shop at the store.

🔹 Warehouse: Costco stores are huge warehouse-style locations that stock a limited number of SKUs (stock-keeping units) in bulk quantities. This allows them to negotiate better prices with suppliers and pass on the savings to members.

🔹 Private Label Brand: Costco’s in-house brand, Kirkland Signature, offers a wide range of products, from food items to clothing and everything in between. These products are known for their high quality at competitive prices.

🔹 Culture: Costco is often praised for its treatment of employees. They typically offer higher wages than competitors and provide benefits even for part-time workers.

🔹 LIFO Inventory: Costco uses the Last-In, First-Out (LIFO) inventory accounting method. This means that the most recently acquired inventory is assumed to be the first inventory sold. Retailers often use this method to reduce their taxable income, resulting in a lower cost of goods sold in times of rising inflation.

🔹 CEO: Craig Jelinek has been Costco’s CEO since Jan 2012 and has been with the company for over 40 years. Under Jelinek’s leadership, Costco has continued to expand its domestic and international operations and has consistently shown robust sales growth.

💰 Quarterly Financial Results on 9/26/23

🔹 Revenue: $78.9B, +9.5% y/y (17-week quarter vs. 16-week previously)

🔹 Operating Expenses: $76.16B, +9.4% y/y

🔹 Net Income: $2.16B, or 2.7% of total revenue

🔹 Membership Revenue: $1.5B, +13.7% y/y

🔹 Comparable Membership Revenue: +7% y/y

🔹 Household Member: 71M, +7.9% y/y

🔹 Executive Member: 32.3M, +3.1% y/y

🔹 E-commerce Sales: -0.8% y/y

🔹 Comparable Total Sales: +1.1% y/y

🔹 Comparable U.S Sales: +0.2% y/y

🔹 Comparable Canada Sales: +1.8% y/y

🔹 Comparable International Sales: +5.5% y/y

🔹 Average Transaction: -3.9% worldwide; -4.5% in US

🔹 Two Costcos will be opened in Shenzhen, China in 2024.

🔹 CFO: Shoppers made more trips to the retailer’s stores, even as they spent less. Sales of pricier items in the U.S., outside of food, were weaker.

Investment Thesis

📈 Bulls Say

🔸 Growth: The growth momentum is good for both regular members and high-end members. Comparable sales in the US, Canada, and international markets are all growing. There is still tremendous potential in the international market.

🔸 Macro Environment: In a high-inflation environment, Costco’s affordable and quality products become even more attractive.

🔸 Management: CEO Craig Jelinek has worked at Costco for over 40 years. Under his leadership, Costco has seen rapid development.

🔸 Economies of Scale: With its large scale and rich consumer data, Costco’s pricing capability and value proposition are far ahead of competitors.

📉 Bears Say

🔸 Growth: Costco’s comparable sales growth is slowing down. The total growth of comparable sales in the most recent quarter is only 1.1%. Additionally, e-commerce sales have shown negative growth for the past three quarters.

🔸 Valuation: Costco’s P/E valuation is much higher than competitors like Walmart or Target.

📝 Conclusion: Hold

Costco’s business is still growing and is financially healthy. The only current drawback is that the stock price/valuation is too high.

⚠️ This article does not constitute investment advice. The pictures and data are from the company’s website. The author strives for accurate information. If there are any issues, feedback is welcome.