Is Costco Stock A Good Buy?
With an earnings report that is expected to reveal increased sales amid coronavirus panic, we ask ourselves: is Costco stock a buy right now?
March 5, 2020

Is Costco stock a good buy? When thinking about some of the greatest business empires to have ever been formed, many investors will think of Steve Jobs' Apple (NASDAQ: AAPL), Henry Ford's Ford Motors (NYSE: F), or Bill Gates' Microsoft (NASDAQ: MSFT). All of these great leaders dared to take a chance and created dynasties that will shape entire generations. 

One name that should be on that list is Jim Sinegal, founder of Costco (NASDAQ: COST), the $137 billion superstore which has become the second-largest retailer in the world. 

While the coronavirus wreaks havoc on the market, the retail giant, along with competitors Walmart (NYSE: WMT) and Target (NYSE: TGT), saw its stock soar 10% on Monday, as thousands flock to stores in order to stock up on supplies. Here is our case for investing in Costco.  

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The bull case for Costco

There are some companies which can be difficult to argue where their strengths lie, and why they might be a good investment. Costco has the opposite problem: where do we begin? 

It is the ultimate steady growth retail stock. Despite the recent market sell-off, Costco has remained relatively flat, and is up nearly 110% in the past 5 years, growing 40% in the past year alone versus the S&P 500's (NYSEARCA: VOO) roughly 10% in the same time period. If that's not enough to convince you, then let's look a little deeper. 

At the chain's fiscal 2020 earnings call last November, Costco reported net sales of more than $36 billion, up 5.6% year on year, while it is likely the company will report that cardholding members have surpassed the 100 million mark at its next earnings call on March 5. Meanwhile, as the 'retail apocalypse' continues to claim big-name scalps such as Under Armour (NYSE: UAA) and Macy's (NYSE: M), Costco is continuing to grow, albeit at a steady pace. The retailer has 782 locations worldwide, up from 592 in 2011. 

Costco also has a very clever, and sticky, business model. Its membership fees, which make up the majority of its revenue, can range anywhere between $60 and $120 per year. For fiscal 2019, this accounted for $3.35 billion, up 8% from the previous year, so we know things aren't slowing down. Another interesting bonus of having members-only shoppers is that Costco boasts that its shoplifting rates are "well below those of typical discount operations". 

I guess nobody wants to steal from somewhere they paid $60 to be. 

There are many more bullish cases for Costco, such as the fact that it has paid three special dividends since 2012, on top of regular payments of between $0.40 and $0.65 in recent years. Digital sales are on the rise, including same-day prescription delivery, which launched last year. To top everything off, it also holds massive pricing power and owns its own supply chain. 

With all that in mind, it's easy to see why Costco is so successful. 

The bear case for Costco

The retail giant's business model is not flawless, despite my best efforts to convince you otherwise. While some of these reasons may be cause for concern, they are not yet reasons to sell.

The big Bezos-shaped elephant in the room is, of course, Amazon (NASDAQ: AMZN), which is on-course to rule half the known world by 2023. With its 2018 purchase of Whole Foods, Amazon has moved into brick-and-mortar grocery, and when Amazon sets its sites on dominating a market, it generally has the means to do so. After all, it recently became America's latest trillion-dollar company. However, many company's that Amazon has threatened have actually thrived; take Netflix (NASDAQ: NFLX) or Etsy (NASDAQ: ETSY) for example.

Another cause for concern is, as mentioned previously, the retail apocalypse. Sure, Costco has not been hit yet, and is even thriving, but who is to say that this could not change in the future? Even if the majority of Costco's revenue comes from membership, if there is a truly terrible recession, people may need to opt-out of that $60 per year membership and simply shop elsewhere. 

So, should I buy Costco stock?

In a retail environment that has been mired in bleak fog in recent years, Costco has been a shining light. Store openings, thriving businesses and continued staff hiring all point towards a company with an impenetrable business model. Sure, it won't return the same gains as many tech or financial stocks, but it is certainly a steady and safe investment. Even the bearish case against Costco is largely speculation, while the numbers behind its solid growth speak for themselves. 

Costco is not your traditional retailer; it has its own unique business model, which often means some investors may not understand just how it works, but in the long run, it is the most solid retail investment on the market right now. 

Costco will be reporting its earnings on March 5, where it is expected to report better-than-expected guidance due to a coronavirus-induced sales boost. 

Download Your Free Stock of the Month Report

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Quickfire round:

Does Costco stock pay a dividend?

Yes, it does, in recent years somewhere between $0.40 - $0.60 per share, while it has also paid out special dividends to reward shareholders on 3 different occasions.

How much does Costco membership cost?

The basic membership costs $60, while premium can cost up to $120.

Will Costco offer a special dividend?

There has been no confirmation of this, but given the company's history, a special dividend payment is possible within the next year.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Costco. Read our full disclosure policy here.

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