COST for growth and dividend?
Summary
Why?
CEO estimated that the stock will double in the next 10 years at the annual meeting on Jan’23.
We go to COST every week; we have 1st hand shopping experience
COST unique culture (we should invest company with unique culture)
Management - Incentive does not come from Stock options; C-level or Sr. position is from their long-time employee only.
Extremely focus on cultivating an excellent relationship with employees, customers, and even suppliers.
The only warehouse/retailer companies do everything they can to lower prices.
Old school culture - no leverage/loans and think long-term.
Long-term strategy
Buy COST using a retirement account to avoid taxing on dividends.
PE around low 30ish; stock price below 430.
Need to figure out the size if we want to enjoy its dividend.
Valuation
COST PE in the last 5 years (since 2018). Given the success of Costco China and its plan in China, I see its growth potential in big time.
Min = 25.74(Dec 24, 2018)
Max = 49.24 (Nov 29, 2021)
Average = 36.48
Median = 36.39 (Jan 10, 2023)
As of 2/24/2023
Share Repurchases
It’s another $4 Billion repurchase plan from 2023 - 2027.
Q4’22, it repurchased 373,000 shares in May, Jun, July, Aug on an average price of $495.49 per share. Highest price was $545.08 and lowest price was $463.77.
During the first quarter of 2023 and 2022, we repurchased 285,000 and 77,000 shares of common stock, at an average price per share of $495.94 and $455.08.
Business
Physical Stores
As of February 2023, Costco has 848 warehouses worldwide: 584 in the United States, 107 in Canada, 40 in Mexico, 31 in Japan, 29 in the United Kingdom, 18 in Korea, 14 in Taiwan, 14 in Australia, four in Spain, two each in France and China, and one each in Iceland, New Zealand and Sweden.
Costco owns land and buildings of almost 80% (661 warehouses) worldwide.
Plan to open approximately up to 29 additional new warehouses, including four relocations in 2023.
CFO, Richard Galanti, mentioned that they want to have 50-50 store splits in the next 5 years (U.S vs. elsewhere)
As of June 2022, Costco in China has announced its plans to open 7 additional stores, mainly located in Shanghai, Guangdong, Jiangsu, and Zhejiang. Among them, the Shenzhen Longhuamen store will be the largest Costco flagship store, and Costco's South China headquarters will also be located in Shenzhen.
Merchandise and Services
Core Business
Foods and sundries (including sundries, dry grocery, candy, cooler, freezer, deli, liquor, and tobacco)
Non-Foods (including major appliances, electronics, health and beauty aids, hardware, garden and patio, sporting goods, tires, toys, and seasonal, office supplies, automotive care, postage, tickets, apparel, small appliances, furniture, domestics, housewares, special order kiosk, and jewelry)
Fresh Foods (including meat, produce, service deli, and bakery)
Warehouse Ancillary (including gasoline, pharmacy, optical, food court, hearing aids, and tire installation)
Gasoline increased to 14% of total net sales in 2022.
Other Business (including e-Comm., business center, travel, and other)
eComm. - 7% of total net sales in 2022
Costco NEXT - Famous brand exclusively for Executive members online shopping only - started Jan’23.
Membership
Costco total membership is 121 million cardholders for 67 million household as of 11/20/22
Renewal rate was 93% in the U.S and Canada; 90% worldwide in 2022.
Executive members totaled 29.1 million and represented 57% of paid members in the U.S and Canada and 22% paid members worldwide. The sales penetration of Executive members represented approximately 71% of worldwide net sales in 2022.
Operation
Highly dependent on U.S and Canadian operations, which comprised 87% and 85% of net sales and operating income in 2022 respectively. Within the U.S., we are highly dependent on our California operations, which comprised 28% of U.S net sales in 2022.
Sales per square foot - COST is high: $1680 per square footage of sales vs. $480 of WMT, and $300 of TGT.
Pricing - 13% markup for most of the product.
Market share
Costco is dominating the subscription type of retail business - Amazon prime was inspired by Costco.
Costco is the #6 largest retailers worldwide and is the 3rd largest in the U.S (behind Walmart and Amazon) as of May 2022.
Costco has 55.5% of the wholesale club market. This number has hovered between 52-56% throughout the past two years. Sam’s Club and BJ’s Wholesale come in second and third place, at 36.2% and 8.3% respectively.
Employees
Maintaining a ratio of at least 50% full-time employees with less than 10% represented by the Union.
Suppliers
Costco has an open contract policy which it pays 35% upfront and no fines to the suppliers if the product cannot be arrived on time.
Easier supply chain management as it has a lot less brick-and-mortar stores.
Competition
Walmart, Target, Kroger, and Amazon are among the most significant general merchandise retail competitors in the U.S. It also competes with other warehouse clubs, including Walmart’s Sam’s club and BJ’s wholesale club.
It seems like Sam’s club has not-so-great employee experience and has the same negative Walmart’s customer service.
Sam’s club is 1/3 of Costco’s revenue as of Dec, 2022.
Earnings
Q1FY23 Earnings (12/09/2022)
Slowdown due to 1) high single digit down of e-comm consumer electronics and appliances a.k.a big ticket discretionary items, and 2) comparing with very strong results in pandemic.
LIFO results in lower inventory costs on the balance sheet because the latest, higher costs were removed from inventory ahead of the older lower costs. LIFO means that the cost of goods sold on the income statement will contain the higher most recent costs.
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