A Look at Costco’s Key Metrics vs. Competitors

January 31st, 2011 by Trefis Team
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Costco (NASDAQ:COST) traditionally competes with warehouse club operators including BJ’s Wholesale Club (NYSE:BJ) and Sam’s Club, in addition to large retailers like Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY) and Target (NYSE:TGT). The retailer operates a warehouse club model wherein it  charges annual membership fees to customers and, in turn, offers deep discounts on selected merchandise. Our price estimate for Costco’s stock stands at $49.76, which is about 30% below market price.

The charts below highlight key metrics like number of stores, revenue per square foot and gross margins for Costco’s U.S. stores vs. other retailer chains like Wal-Mart, Sam’s Club (owned by Wal-Mart) and Best Buy.

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Observations

We estimate that Costo had close to 416 stores in the U.S. at the end of 2010 compared to an estimated 611 for Sam’s Club which is its direct competitor with similar business model. On the contrary, Best Buy had a much higher count of about 1,100 with Wal-Mart at a massive 3,820 stores as per our estimates. We can infer that the retailer has comparatively lower penetration and could do well by opening more stores, especially into urban markets. We wrote an article previously on how Costco is looking at malls to expand into urban areas (see article Costco’s MallStrategy Could Boost Stock by 3%).

Estimated store count for 2010

Additionally we can see that Costco’s margins are comparable to Sam’s Club’s which makes sense because of similarity in business models. However these margins are much lower than that for Best Buy and Wal-Mart. This is simply due to the fact that Costco offers discounted on selected merchandise and relies on higher sales turnover. In order to let customers buy discounted merchandise, the company charges annual membership fee. This is attractive to bulk buyers for whom the membership fee pales in comparison to the savings they can get from bulk purchases. As a result, the revenue per square foot figure is also on the higher side. However it is interesting to note that despite same business model, Costco has significantly higher revenue per square foot compared to Sam’s Club.

Chart 1 - Estimated revenue per square foot for 2010, Chart 2 - Estimated gross margins for 2010

You can see the complete $49.76 Trefis price estimate for Costco’s stock here.