Costco Wholesale Corporation

In this profile, we examine Costco's impressive track record and consider whether future growth prospects are likely to justify today's lofty valuation.

Introduction

Costco operates a chain of 840 membership warehouses located in thirteen countries. Warehouses feature well known branded merchandise sold at prices far below conventional retailers as well as Costco’s Kirkland Signature private label which has earned a reputation for delivering quality on par with or better than national brands. Warehouses have few frills or amenities and average 146,000 square feet. Costco strives to deliver products to customers at the lowest possible gross margin, creating an undeniably compelling value proposition.

Costco’s low prices are available only to customers who purchase an annual membership. There are 118.9 million Costco cardholders representing 65.8 million paid memberships. In the United States, a Gold Star membership costs $60 and provides basic access to warehouses while a $120 Executive membership provides additional benefits including the opportunity to earn reward certificates worth up to $1,000 per year. Members renew at rates in excess of 90 percent and are known to be very loyal shoppers.

In Costco’s latest fiscal year, the company posted revenue of $227 billion, operating income of $7.8 billion, and net income of $5.8 billion. The market has rewarded Costco’s long track record of profitability and growth with a valuation of $220 billion assigning the shares a premium multiple of 38 times trailing earnings. In this report, we will examine Costco’s business and consider whether the market’s positive assessment is justified.

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