Amazon-Proof Retail Stock: Costco Wholesale

(Image credit: krblokhin)

Amazon.com (symbol AMZN) is projected to account for one-half of all internet-based U.S. retail sales by 2021, according to brokerage firm Needham & Co., up from about one-third of sales in 2016. The threat to competitors in the retail space has become so dire that a "Death by Amazon” index that tracks the stock prices of 54 retailers sits near a four-year low, according to research firm Bespoke Investment Group, which compiles the index.

Yet, there are a few big retailers that are finding ways to thrive despite the Amazon onslaught. Warehouse club Costco Wholesale (COST) is one of them. Here's why its stores and its stock should stand up to competition from Amazon. (Share prices, returns and other data are as of April 25.)

Costco’s main weapon against Amazon is the warehouse club’s thriving grocery business. About 82% of shoppers visit Costco primarily to buy groceries, according to a new survey by investment firm Barclays. Many Costco shoppers come to buy frozen foods, meat and produce, which are expensive to transport for home delivery without spoilage. Moreover, Costco’s customers tend to be affluent and loyal. Around 88% of its 86.7 million cardholders renew their memberships every year, Costco says.

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Amazon Fresh, the online retailer’s grocery delivery service, poses competition as it expands across the country. But Costco members shop on Amazon primarily for electronics, books and clothing, with groceries accounting for just 25% of purchases, says Barclays. Moreover, Amazon Fresh deliveries cost $15 a month, on top of a $99 annual membership in Amazon Prime. Costco may be able to beat Amazon’s food prices, too, because the warehouse club’s shoppers buy bulk items that cost less per unit.

Even with 729 stores worldwide, including locations in Canada, Mexico, Japan and Taiwan, Costco still has plenty of room for expansion. The company plans to open 30 new stores, including 15 in the U.S., in its 2017 fiscal year (ending in August). Profits could get a lift from an increase in membership fees, slated to bump up in June. Customers lured by the company’s discounted gasoline also tend to shop in the store.

Granted, Amazon could expand its grocery lineup and trim its delivery charges, making Costco less of a bargain in comparison. For now, though, Costco “remains protected” from Amazon and other competitors, says Barclays, which recently upgraded the stock from “neutral” to “buy” and expects shares to hit $185 over the next 12 months. Costco recently announced a “special dividend” of $7 per share, moreover, payable to shareholders who own the stock as of the market close on May 10. The payout comes in addition to the company’s quarterly dividend of 50 cents a share.

Costco by the Numbers

Share price: $172.68
Market value: $75.8 billion
Price-earnings ratio: 31
Estimated 12-month profit growth: 14%
Dividend yield: 1.0%

Check out five other retailers that can stand up to Amazon.

Daren joined Kiplinger in July 2015 after spending more than 20 years in New York City as a business and financial writer. He spent seven years at Time magazine and joined SmartMoney in 2007, where he wrote about investing and contributed car reviews to the magazine. Daren also worked as a writer in the fund industry for Janus Capital and Fidelity Investments and has been licensed as a Series 7 securities representative.