Costco Is Challenging Amazon as the Most Richly Valued Retailer. Why It Deserves the Title. | COST Message Board Posts


Costco Wholesale Corporation

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Msg  89 of 92  at  4/11/2022 12:03:03 PM  by

jerrykrause


Costco Is Challenging Amazon as the Most Richly Valued Retailer. Why It Deserves the Title.

 

Costco Is Challenging Amazon as the Most Richly Valued Retailer. Why It Deserves the Title.

 
 

Costco Wholesale is challenging Amazon.com as the most richly valued retailing giant in the country.

The warehouse club leader continues to win over investors with its distinctive strategy. It keeps things simple with limited selection, low prices, and executes well. It has shown that a significant Internet presence isn't critical for retailing success. With just 7% of its sales online, it's the anti-Amazon.

Costco Wholesale shares (ticker: COST) have been on a roll lately, rising 4% in April to $600 after hitting a record close Thursday. The stock is up about 66% in the past 12 months. By contrast, Amazon.com (AMZN) stock is off 6.4% in the past year.

Costco shares now trade for 46 times projected earnings of $13 a share in the company's fiscal year ending in August and for 42 times estimated earnings in the following fiscal year ending in August 2023.

That's the highest price-to-earnings ratio for any major traditional retailer and just under Amazon's 2023 P/E ratio of 43.

With its dominant online retailing franchise and leading cloud computing business, Amazon has long had the highest P/E among big retailers—although it is part retailer and part technology company. Amazon's retailing P/E arguably is less than 43 due to the high value of Amazon Web Services, its cloud operation.

Costco actually is richer than Amazon based on projected 2023 earnings before interest, taxes, depreciation, and amortization, or Ebitda. It trades for about 22 times expected 2023 Ebitda while Amazon fetches around 16 times. Costco's market value is $270 billion, a fraction of Amazon's $1.6 trillion.

Costco continues to crank out strong results, with March comparable sales rising about 10% when adjusting for various factors including high gasoline prices. Earnings per share are expected to rise 18% in the current fiscal year and 10% next year. Earnings have risen at a 16% annual clip over the past five years, according to FactSet. Costco's high P/E makes it vulnerable to any disappointment.

With its rock-bottom prices and treasure-hunt atmosphere, Costco continues to draw shoppers to its warehouse clubs. High inflation is adding to its consumer appeal. Costco earns the bulk of its profits from membership fees—the base fee is $60 a year. This gives the company a subscription-like model with renewal rates regularly running around 90%.

Costco generally won't mark up prices of any goods more than 15%. That makes the Costco value proposition almost impossible to beat. Costco can make money with such low markups because it keeps expenses low, although it pays employees better than most rivals, including Walmart (WMT).

Membership continues to grow, rising 7% in the company's latest fiscal year to 61.7 million members. The company operates 829 warehouses mostly in the U.S.

Another secret to Costco's success is controlling shoplifting—an i ncreasing industry problem . The company has kept losses to theft at the some of lowest levels in retailing. Costco's "shrink" remains in the 0.1% to 0.15% range annually, while many retailers are in the 3%-plus area.

The low shrink is a result of several factors. There normally is only one entrance to a Costco warehouse and employees check receipts. Goods are often bulky and therefore tough to steal. And shoppers are "members" and that self-selection tends to weed out thieves.

After Costco reported strong March sales gains, UBS analyst Michael Lasser wrote last week the company is taking "the right steps to remain relevant in a postpandemic world. Plus, heightened pressure on the consumer could drive another leg of growth in both membership and retail spending. We don't think the company's shares fully reflect these tailwinds." He has a Buy rating and price target of $625.

 


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