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Costco Still Delivers Sustainable Profits Despite the Inflationary Crisis

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Costco Wholesale (NASDAQ:COST) is a leading chain of club membership stores. The company is famous for its unique business model, where it sells large numbers of items in bulk at low profit margins. By contrast, it instead makes much of its money through its yearly membership program where people pay to get to shop at Costco. This has been a winning model for COST stock, which is up 237% over the past five years.

A Costco Wholesale (COST) warehouse in Auburn Hills, Michigan.
A Costco Wholesale (COST) warehouse in Auburn Hills, Michigan.

Source: ilzesgimene / Shutterstock.com

However, there are some skeptics starting to emerge. Just since Covid-19 began, the price of COST stock surged from $300 per share to $560 today. Some analysts see that as too far, too fast. Surely, there will be slowing momentum at some point as the pandemic-driven sales roll off and things return more toward normal.

That’s a logical and sensible theory. However, there’s little actual evidence of it playing out in practice. Costco is still posting stunning double-digit sales growth numbers now two years removed from the onset of the pandemic. The predicted reopening slowdown simply hasn’t happened.

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Loyal Workforce Is More Valuable Than Ever

It’s no secret that Costco has a well-trained, well-paid labor force as far as the retail sector goes. Costco’s minimum wage is $17 per hour, a figure that it just raised once again last fall. That’s the minimum here, not the average or median. The average wage, at least in 2021, was closer to $24 per hour, as per the company’s CEO.

Costco also has a variety of unique perks that are uncommon in retail. For example, it pays time-and-a-half to hourly workers for shifts on Sundays. This means that if a Costco employee normally earns $20 per hour, he or she would earn $30 per hour for their Sunday schedules. Costco also allows all its employees, even part-time ones, to have access to health benefits.

It doesn’t stop there. Employees get free Costco memberships, discounts on Costco services, features such as Costco’s auto insurance program with free roadside assistance and so on. Combine all these perks with the $17 per hour minimum wage, and employees can make a real living at Costco as opposed to what they might find at most other retailers. Add these factors together, and Costco is one of the few retailers to regularly make Glassdoor’s 100 Best Places to Work list year in and year out.

In a normal economy, maybe this happy well-treated labor force doesn’t seem like a big deal. Nowadays, however, with labor shortages and rapidly-escalating wage spirals, many retailers are having to curtail hours or otherwise cut back due to employee shortages. Costco, however, by playing the long game and maintaining a happy workforce has now put itself in a superior position for handling this current inflationary environment.

Costco Is A Low-Price Leader

Another big advantage for Costco is that customers know that it doesn’t play games with its product pricing. Costco has a well-known policy of charging a certain low gross profit margin, such as 15%, on goods that it sells.

In doing so, it isn’t try to nickel and dime people by selling some goods at low prices and other ones at fat markups. That is a decided shift away from the usual grocery store model, which is built around discounting some goods and then making large profits on other impulse buys. Costco has that trust that it sells things at fair prices and isn’t ever going to rip the customer off.

That’s useful in any economic climate. It’s particularly crucial now, however, as inflation is ripping through the food aisles. The price of meats, dairy products, grains, and vegetables, among other goods, have soared over the past 12 months. The price of wheat in particular has soared since the Ukrainian war began, leading to further stress on the food supply chain and thus grocery store prices.

With the prices of basic food stuffs surging 20%, 30%, and sometimes even more over the past year, consumers are getting upset and worried. It’s hard to know who is to blame. Is it monopolies such as the meat industry driving up prices, as the Biden administration contends? Are packaged foods makers raising prices too quickly to fatten their wallets? And are grocery stores adding to their mark-ups as well?

Given all that skepticism, Costco’s transparent and trustworthy stance on product pricing is more valuable than ever. A shopper knows they’re going to get a fair deal buying at Costco. Prices may be up sharply even at Costco, but it isn’t due to corporate greed on the part of Costco’s operations.

COST Stock Verdict

During the pre-pandemic era, you sometimes saw analysts poking fun at Costco. If only they raised prices a little more, they could really drive up earnings. Or what if they offered compensation packages more in line with grocery store peers instead of paying so much to their workers? It was easy to imagine a leaner more efficient Costco back in 2018 or so.

However, Costco’s approach in regard to going the extra mile for both employees and customers is bearing fruit now. Costco is a rare retailer that is deeply respected by both its workforce and its customers. In times as volatile as these, that trust is worth more than most investors may realize.

Sure, COST stock is expensive on traditional valuation metrics. If you’re waiting for a bargain purchase, this isn’t the right time as far as Costco goes.

However, the company’s brand and market positioning is stronger than ever, as its sales data over the past two years has proven. And in a world increasingly struggling with inflation, labor shortages, and supply chain snags, Costco is a solid defensive play that can endure whatever geopolitical issues may come its way.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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