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Costco: A Strong End to the Year

Costco (COST) recently reported financial results for the fourth quarter of fiscal 2019. It was another stellar year for the company, with net sales increasing 8% to $149.4 billion. As shown below, revenues have consistently increased at an attractive rate over the past decade (with the 2015 and 2016 results both reflective of currency headwinds and gas price deflation):

Same store sales (comps) increased 6% in the fourth quarter and for the full year, led by a roughly 4% increase in customer traffic. Comps were helped by 23% growth in the company's e-commerce business, which now accounts for roughly 5% of its revenue. As I've noted in the past, it's worth remembering that Costco continues investing to support e-commerce growth, including regional grocery distribution centers, in-store pickup lockers to support buy online, pickup in store, and launching the online offering in new geographies like Japan and Australia.

Total cardholders at year end numbered 98.5 million, an increase of more than 4%. As noted on the call, renewal rates domestically (90.9%) and internationally (88.4%) are at all-time highs. Costco ended the year with more than 780 warehouses around the world, an increase of 3%. This marks a continuation of consistent, low-single digit unit growth.

The fourth quarter included the highly anticipated opening of Costco's first warehouse in China. As CFO Richard Galanti discussed on the call, the response by consumers was remarkable:

"I mentioned earlier that during the quarter we opened our first unit in China in the city of Minhang, part of Shanghai. That was on August 27 to a great interest. Due to the overwhelming crowds, it was actually closed for about four hours on opening day. Subsequently, crowds have been well managed and sales have remained very strong over the past month. We've had record sign-ups there. I think it's been helped by being the first one that we've opened there as well as the social media presence. We currently have over 200,000 members signed. Just to put that in perspective, the average Costco - ones that have been opened for months and ones that have been opened for 35 years - all totaled have approximately 68,000 member households per location. Our next opening is planned for early 2021 and also in Shanghai in the area of Pudong."

Net income in 2019 was $3.7 billion, with diluted earnings per share (EPS) climbing by a mid-teens percentage to $8.3 per share (with help from about $200 million less in taxes this year).

Costco continues to have a strong balance sheet, with $9.5 billion in cash and short-term investments at year end versus $6.8 billion in total debt. They remain much more conservatively financed than many of their retail peers, with room for outsized capital returns in the future (Costco repurchased $247 million worth of stock in 2019 at an average cost of $225 per share).


As shown below, Costco has followed a consistent formula over the past 5 - 10 years: mid-single digit revenue growth due to a combination of new units and higher comps, a high-single digit increase in operating income, and low double digit diluted earnings per share (EPS) growth, with help on the latter figure from a lower tax rate. It's a formula that has worked well for investors.

As it relates to the current investment opportunity, the stock trades at 36 times trailing earnings. You need to believe they will continue to execute for a long time to justify that multiple. I'm personally not comfortable paying that much. For now, I'll stand on the sidelines and hope that Mr. Market gives me a chance to invest in Costco at a price that I find more attractive.

Disclosure: None

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This article first appeared on GuruFocus.