View | Modify | Create | Collaborate
Subscribers renewed at about the same industry-leading 91% rate from the previous quarter and membership fee income again grew at roughly 5% thanks to the combination of a growing base and higher penetration of Costco's premium subscription offering. These wins powered a sharp earnings increase as operating income jumped 32% to $1.9 billion.
Below are key drivers of Costco's value that present opportunities for upside or downside to the current Trefis price estimate for Costco:
For additional details, select a driver above or select a division from the interactive Trefis split for Costco at the top of the page.
Costco is the second largest retailer in the U.S. and the largest in the warehouse club category with revenues of $152 billion at the end of 2019. Costco operates on the business model of charging membership fees from its customers in exchange for heavy discounts on selected brands of a wide variety of merchandise. At the end of 2019, the company operated about 782 warehouses globally; including 543 in the U.S., 100 in Canada, 39 in Mexico, 29 in U.K., 26 in Japan, 13 in Taiwan, 16 in Korea, 11 in Australia and 2 in Spain. It has approximately 98,500 members including 42,900 gold star members. Besides selling merchandise, Costco provides in-store services like fuel, hot-dog stands, and optical centers to attract customers to shop more frequently.
Costco competes with Sam's Club and BJ's in the warehouse club business. Its competitors have a very similar business model. However, BJ's focuses primarily on retail shoppers while Costco and Sam's Club concentrate on small business customers. Thus, Costco primarily competes with Sam's club nationwide while BJ's presence is limited to fewer areas of the US. Warehouse clubs tend to attract business customers with additional rewards and services.
Costco's membership fee increased with effect from June 1, 2017. The company hiked the price of its Gold Star membership by $5 per year to $60 and raised its Executive membership fee to $120 from $110. In addition, the company reported that the maximum annual 2% reward associated with the Executive membership will increase from $750 to $1,000. Prior to this increase, the retailer last increased its membership fee in November 2011.
In 2019, Costco continued to add members, while maintaining a renewal rate of around 91%. This is significant because Costco relies heavily on its membership fees, despite the fact that these fees account for only 2% of the company's total revenues. The company's membership fees contribute around 16% of the company's value, per Trefis estimates, given the low costs associated with this revenue stream.
The Core Merchandise U.S. segment is the most valuable to the company. Costco has built a strong relationship with its customers and is clearly positioned to thrive in a weak economy. Costco operated about 543 warehouse clubs in the U.S. versus 239 warehouse clubs internationally as of the end of 2018. These warehouses contributed more than 58% of Costco's total merchandise sales.
Executive members pay $120 as membership fee (as opposed $60 paid by the other members) to get 2% (maximum of $1000) annual rewards on their purchases. They represent more than one-third of Costco’s overall customers and two-thirds of its revenues. Executive membership penetration is on an upward trend and has increased from about 38% in 2009 to close to 39% in 2018.
Costco has recently expanded in Iceland and France. It is still expanding in the Asian and Australian markets, where it has a limited presence. Costco has the capability to operate about 100 stores in Taiwan, Korea and Japan combined and about 20 stores in Australia. It currently has 55 stores in Taiwan, Korea, and Japan combined and 11 stores in Australia. This clearly indicates the expansion opportunity in these selected countries. China and India could be potentially huge markets for future expansion. Other big retailers like Wal-Mart have expressed interest in these markets and are exploring various opportunities to grab the share of the growing retail market in these two economies.
Warehouse clubs like Costco present unique opportunities for regular and bulk buyers to save money by buying merchandise discounted at higher rates compared to other retailers. This business model has enabled Costco to thrive despite the weakening economy and is likely to boost sales in developing markets where consumers and businesses are even more cost-conscious.
Costco has seen tremendous growth in its e-commerce revenues in the recent past. Like other retail chains in the U.S. market, Costco also relies on its store sales for a bulk of its revenues. The retailer earns just 4% of its overall revenues through e-commerce sales. However, this share is likely to go up in the future as the company is deploying several initiatives to develop its web and omnichannel platform.
Costco is strategically trying to enter other market segments by partnering with strong existing players in the industry. In April 2012, Costco launched a mortgage program in partnership with First Choice Bank and 10 other lenders. It intends to leverage its customer base and wider presence to market this program. Costcofinance.com, Costco's mortgage lending site, gathers rates from different lenders and provides a summary of competitive quotes to its customers. In return, it gets paid for marketing this service to its customers.
It has also partnered with Aetna, one of the world's largest managed health care services company, to offer health insurance services. The Costco Personal Health Insurance program offers five Aetna health plans with major medical benefits and dental coverage. This partnership would likely benefit from several synergies associated with Costco's affluent customer profile and Aetna's expertise in the health insurance industry.
Although the company still has scope for expansion in the U.S., we do not negate the possibility of self-cannibalization. Going forward, we expect the US market for the company to saturate in terms of geographic coverage, and expect Costco to focus on international expansion.
The key selling point of Costco is its private label brands such as Kirkland Signature. According to the company, these brands are comparable in quality to national brands and are often cheaper. The retailer has been increasing the share of these brands within its overall product range by 0.5%-0.75% annually. Private label brands accounted for about 30% of Costco’s merchandise at the end of 2018.
The retail business has become highly competitive. Costco competes with over 800 warehouse club locations across the U.S. and Canada. It faces stiff competition from Wal-Mart, Target, Kohl's, and Amazon in the general merchandise retail segment.
With the onset of online retailers like Amazon and eBay, the competition has led to competitive pricing which in turn, has led to a fall in prices and gross margins consequently.
Walmart stock (NYSE: WMT) has grown by close to 16% since early February after the WHO declared the Coronavirus a global health emergency, while Costco stock (NASDAQ: COST) has gained about 12% of its value. ...More
Costco's (NASDAQ: COST) stock grew 7% from $291 at the beginning of this year to $312 on April 20, compared to a 13% decline for the broader S&P 500. While Costco's stock has outperformed thus far, we believe there could still be a modest upside from the current levels. ...More
The consumer spending trends are setting up well for the grocery-led retailer sector. Costco (NASDAQ: COST) and Walmart (NYSE: WMT) are seeing the fear-led public stocking up on essentials at its outlets (or through delivery) during this coronavirus crisis. ...More
Costco (NASDAQ: COST) spent $15.1 billion on Selling, General and Administrative expenses in FY 2019 (ended August 2019) which was 9.9% of Total Revenues. Trefis estimates the expense to be around 9.8% of Total Revenue in 2020 (ended August 2020). The Company's total expenses have trended steadily higher from around $126. ...More
No, Costco (NASDAQ: COST) doesn't look undervalued. As per Trefis, the price estimate of Costco's stock is $299, which is similar to its current market price. ...More
Walmart (NYSE: WMT) provides the opportunity to people to shop and save money through retail stores and eCommerce. The company comprises three operating segments: Walmart U.S., Walmart International, and Sam's Club. They strive to continuously improve a customer-centric experience that integrates eCommerce and retail stores in an omni-channel offering that saves time for customers. ...More
Costco (NASDAQ: COST), whose stock is currently trading at around $290, generates its revenue primarily from its US segment which is projected to account for 57% of total revenues in 2019, while the International segment is expected to be the 2nd highest contributor to the top line at 22.9%. ...More
Costco's (NASDAQ: COST) stock price has increased nearly 2x from $140/share in August 2015 to $274/share in August 2019. The increase was primarily driven by continuous increase in Total Revenue and Net Income margin. Revenue growth and margin increase are expected to continue in FY 2019. ...More
In this note, we analyze the factors that could lead to further upside to Costco's (NASDAQ: COST) stock price in the coming year. Trefis currently has a $240 price estimate for Costco's stock, which is slightly ahead of the current market price. ...More
Costco's (NASDAQ: COST) fiscal second quarter earnings per share came in ahead of market expectations, while revenues missed. In Q2, Costco's total revenue increased 7% year-over-year (y-o-y) to around $35.4 billion, driven by growth in membership fees and a 5% increase in comparable sales. The retailer reported net earnings of $2.01 per share, up 27% y-o-y. ...More
Costco (NASDAQ: COST) is scheduled to announce its fiscal second quarter earnings on Thursday, March 7. In Q1, Costco's total revenue increased 10% year-over-year (y-o-y) to around $35 billion, driven by growth in membership fees and a 9% increase in comparable sales. The retailer reported net earnings of $1.73 per share, up 20% y-o-y. ...More
Costco (NASDAQ:COST) saw its stock price increase by nearly 10% over the course of 2018. Much of that increase was due to the company's strong comparable sales growth in the U.S., as well as international markets. We have a $238 price estimate for Costco, which is almost 15% ahead of the current market price. ...More
Costco's (NASDAQ: COST) fiscal first quarter earnings per share came in below market expectations on an adjusted basis, while revenues saw a slight beat. In Q1, Costco's total revenue increased 10% year-over-year (y-o-y) to around $35 billion, driven by growth in membership fees and a 9% increase in comparable sales. The retailer reported net earnings of $1. ...More
Costco (NASDAQ: COST) is scheduled to announce its fiscal first quarter results on Thursday, December 13. Costco's revenue increased 5% year-over-year (y-o-y) to around $44.4 billion in the fourth quarter, driven by growth in membership fees and a 10% increase in comparable sales. The retailer reported net earnings of $2.36 per share, up 13% y-o-y. ...More
Costco's (NASDAQ:COST) fiscal fourth quarter revenue came in ahead of market expectations while earnings per share came about in line with consensus. However, the stock traded down as gross margins narrowed despite higher sales and the company disclosed a material weakness in its internal controls. ...More
Costco (NASDAQ:COST) is scheduled to announce its fiscal fourth quarter results on Thursday, October 4. The company announced solid third quarter results, as both its revenue and earnings per share came in ahead of market expectations. ...More
Costco's (NASDAQ: COST) fiscal 2018 performance has been mostly above its guidance and market expectations. The company has had a productive fiscal year thus far, with a 10% gain in same-store sales and a 10% year-over-year (y-o-y) growth in total revenues over the first three quarte... ...More
Costco's (NASDAQ:COST) 2018 performance has been mostly above its guidance and market expectations. Costco has had a productive year so far, with 8% and 10% gains in same-store sales in the quarters ending February and May, respectively. In addition, the company has continued to add members, while maintaining a retention rate of around 90% over this period. ...More
Costco's (NASDAQ:COST) 2018 performance has been mostly above its guidance and market expectations. Costco has had a productive year so far, with an 8% and a 10% gain in same-store sales in the quarters ending February and May, respectively. In addition, the company has continued to add members, while maintaining a retention rate of around 90% over this period. ...More
Costco (NASDAQ:COST) announced solid third quarter results on Thursday, as both its revenue and earnings per share came in ahead of market expectations. However, the company's stock was marginally down in after-hours trading as the company's gross margins narrowed despite higher sales. ...More