Big Upside for Costco Stock
Costco Wholesale Corporation (NASDAQ:COST) reached an all-time high of $166.00 last December and it should easily repeat or exceed that record this year. Now that Costco stock is trading approximately $18.00 lower from that high point, it is a bargain. That’s because Costco has shown continuous capacity for year-over-year growth. Last year alone, the stock posted three percent higher revenue. Costco’s business model is the key to this growth.
Indeed, Costco continues to grow faster than its main rivals, Wal-Mart and Target. It is pursuing new markets both in terms of geographic expansion (hitting untapped areas like Europe) and in terms of finding special niches (like organic food), banking on surging demand.
Most analysts rate Costco stock a “Hold,” “Buy,” or “Strong Buy.” Over the past year, Costco stock has gained about 20%. Overall, analysts following Costco are expecting a target price of $169.35, which would be a new all-time high. Costco stock has been trading in a range of $150.00 to $158.00 lately.
How Costco Will Meet Growing Demand in Organic Food
Costco’s business strategy is about to take a further leap from Wal-Mart, capitalizing on consumers’ demand for healthier food. Costco wants to work directly with farmers to offer a reliable supply of organic foods to the wholesale retailer’s customers.
As Costco works to strengthen its organic food business, it is not satisfied with relying on external suppliers. Instead, the company is actually buying 1,200 acres of land and the equipment to farm it in the Mexican state of Baja California, specifically to ensure it has enough organic foods to address soaring demand. Indeed, supply has not kept up with demand. (Source: “Costco Moves Into Organic Investments to Ensure Supply,” Triple Pundit, April 11, 2016.)
Organic foods are the “hot” item in food and sales are surging. In the United States, organic food sales increased from $11.1 billion in 2004 to $35.9 billion in 2014, according to the Organic Trade Association. Those numbers are the equivalent of 10% per-year growth. This is remarkable given that the food industry in its entirety has grown at just two percent per year. (Source: Ibid.)
Costco’s Business Model: Key to Growth
One of Costco’s special features that makes the company stand out in the retail sector is that it relies on a subscription, or membership, model. Unlike many rivals, Costco does not rely on expensive advertising. Its stores are models of austere efficiency. The company does not even buy signs to direct customers along its spacious aisles. And it manages to attract ever more customers, charging them a membership fee for the privilege of taking advantages of its special prices.
The magic is that people want to keep shopping at Costco. It has 44.6 million members worldwide according to the company’s annual report. (Source: “Instant Expert: How Costco takes aim at your wallet,” CBS, April 9, 2016.)
Its membership numbers are even more staggering when you consider its Canadian presence. Costco is said to have 11.5 million Costco cardholders, which is a third of Canada’s population. (Source: Ibid.)
Psychology certainly comes into play. Costco’s prices and goods evidently give its customers a genuine feeling they are getting a bargain, fueling a positive reinforcement akin to excitement. Paying for a membership fosters a sense of exclusivity as well. This keeps the customers coming back in droves.
The membership fee accounts for the fact that Costco has a much lower markup than competitors: 15% or less. Estimates for other supermarkets suggest a 25% markup and for retail department stores, the average markup is 50%. (Source: Ibid.)
Costco’s Presence and Expansion
Perhaps Costco stock may have suffered somewhat from its delay in opening in France. Costco now says that its landing in Paris will not occur until the spring of 2017. Customers had anticipated the opening of the first French Costco in the fall of 2016 in Villebon-sur-Yvette. Nevertheless, Costco will still be expanding into France. (Source: “L’arrivée de Costco en France retardée au printemps 2017,” Business Immo, March 25, 2016.)
Costco Wholesale is the world’s second-largest retailer, after Wal-Mart, with more than 680 stores, most of which are in the United States and Canada. The chain is expanding in Europe, starting in the challenging French market, where it will compete with the likes of local establishments like Carrefour, but it is already strong in the U.K., Japan, Taiwan, Spain, Germany, and Australia.
The Bottom Line on Costco Stock
Meanwhile, Costco Wholesale reported a three-percent increase in sales this March, hitting $10.7 billion, compared to the same month of 2015. Same-store sales excluding fuel and at constant exchange rates have increased quarterly. Costco Wholesale will present its third-quarter results on May 25.
Those investors who have not yet included Costco in their portfolio should consider taking a closer look at the stock. The company presents a coming together of key favorable factors, such as lower margins and higher growth potential than its competitors. The general picture is of a company with tremendous revenue growth potential and reasonable liabilities, which will translate to high returns—backed by a history of solid stock performance.