When the economy gets tough, penny-pinching consumers choose Spam instead of ham. They also tend to buy in bulk to save on grocery costs.
Both trends benefit Costco Wholesale, the warehouse-club giant. "Costco is better equipped to weather a recession than other retailers since food is 60% of its sales mix," says Stephanie Hoff, an analyst at Edward Jones.
If you invested in Costco a year ago, you're getting an even better deal that its 52 million shoppers. The stock (symbol COST), which closed at $66.62 on March 26, has climbed 21% over the past 12 months, handily beating Standard & Poor's 500-stock index, which lost 7% over the same period.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Costco is the biggest wholesale club operator in the country by sales, with about 530 stores in 40 states and a handful of countries. The stores carry about 4,000 items -- a fraction of the variety offered by rival discounters, such as Wal-Mart Stores (WMT) and Target (TGT). Costco caps mark-ups at about 14% above the cost of merchandise, well below that of other big retailers, which typically set prices at 25% to 50% above costs. Costco also provides financial services and sells gasoline.
The slumping economy is allowing Costco to upgrade its merchandise. Many companies that previously turned up their noses at the company's cavernous, non-descript warehouses are selling to Costco now that shoppers are spending less time and money at upscale malls. Among previously unavailable clothing lines that Costco started carrying recently, at prices well below those charged by other retailers, are Janzen, Hurley, Lucky and OshKosh.
Analyst John Gabriel of Morningstar notes that Costco also benefits from the decision of many retailers to freeze expansion plans. That gives Costco more choices and more bargaining power as it picks locations for new sites.
The Issaquah, Wash., company plans to open 16 to 18 new stores before the conclusion of its fiscal year, which ends on August 31. Longer term, chief executive Jim Sinegal says he's wants to double the size of the business over the next ten years.
Costco posted strong results during its second fiscal quarter, which ended on February 17. It said that customers visited its stores slightly more often and made larger transactions than in the same quarter a year earlier.
Helped by rising gasoline prices, revenues rose 12% from the year-ago quarter, to $17 billion, while sales from stores open a year or more rose 7% ((without the jump in fuel prices, the increase in U.S. same-store sales would have been 3%). Profits increased 31% from the same period a year earlier, and operating margins (profits from operations divided by revenues) expanded slightly, to 3% from 2.4%, as store productivity improved.
The number of new households signing up for membership jumped 11% during the quarter. That's an important figure because annual membership charges of $50 or so are vital to Costco's bottom line. Costco's 87% membership renewal rate reflects the loyalty of its shoppers. Membership fees totaled $343 million in the second quarter.
The company is taking other steps to boost profits. It has tightened its return policy for electronics and is looking to gain a bigger foothold overseas (it currently operates in Canada, Mexico, the United Kingdom, South Korea and Taiwan).
Costco is also getting a boost from higher sales of its private-label Kirkland brand. Sales of the in-store brand rose by more than $600 million over the past 12 months.
Naturally, there are some chinks in the bullish case for Costco. For starters, the stock is pricy. It trades at 21 times the average of analysts' earnings estimate of $3.08 per share for the 12-month period that ends in November. That compares with a price-earnings ratio of about 13 for the S&P 500 and an average P/E of about 16 for the stocks of major retailers. Costco's P/E is also well above the 13% annual earnings growth that analysts expect the company to generate over the next three to five years.
And Costco, of course, isn't just a purveyor of tilapia and toilet paper. The company acknowledges that the economic slowdown is affecting causing customers to hold off on purchases of big-ticket items such as jewelry and furniture.
Costco also faces heavy competition from supermarket chains, discounters and other warehouse clubs, such as BJ's and Wal-Mart-owned Sam's Club. And Costco's California stores account for more than 30% of its sales, so any major regional hiccup could hurt sales and profits.
But with little long-term debt and enough cash flow to support store expansion, Costco is well positioned to improve profits and maintain its leading position among warehouse stores. So don't just think of this big-box leader as a great place to go shopping. Think about putting the company itself on your "to buy" list.
-
Stocks Keep Climbing as Fed Meeting Nears: Stock Market TodayA stale inflation report and improving consumer sentiment did little to shift expectations for a rate cut next week.
-
Your End of Year Insurance Coverage Review ChecklistStop paying for insurance you don't need and close coverage gaps you didn't know about with this year-end insurance review.
-
Crypto Trends to Watch in 2026Cryptocurrency is still less than 20 years old, but it remains a fast-moving (and also maturing) market. Here are the crypto trends to watch for in 2026.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
Nasdaq Rises 2.7% as Musk Tweets TSLA Higher: Stock Market TodayMarkets follow through on Friday's reversal rally with even bigger moves on Monday.
-
If You'd Put $1,000 Into Home Depot Stock 20 Years Ago, Here's What You'd Have TodayHome Depot stock has been a buy-and-hold banger for truly long-term investors.
-
What the Rich Know About Investing That You Don'tPeople like Warren Buffett become people like Warren Buffett by following basic rules and being disciplined. Here's how to accumulate real wealth.
-
Stocks Retreat as Shutdown Continues: Stock Market TodayWhile the main indexes closed lower today, Delta and PepsiCo gained ground on encouraging earnings reports.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have TodayORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
