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Costco- A Survivor in Retailing

Retailing stocks have been a dangerous place to invest in recent years. Increased competition in virtually every retailing market, the “Amazon” effect, and the “death of the mall” have impacted a host of retailers, observes Chuck Carlson, editor of DRIP Investor.

Retailing stocks have been a dangerous place to invest in recent years. Increased competition in virtually every retailing market, the “Amazon” effect, and the “death of the mall” have impacted a host of retailers. However, one retailer that continues to thrive in this competitive environment is Costco Wholesale (COST).

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Costco operates approximately 770 warehouses, including 535 in the U.S. and Puerto Rico, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, two in Spain, and one each in Iceland and France. A big part of Costco’s appeal is its business model.

The company’s membership model, in essence, means that shoppers pay Costco for the privilege of shopping at their stores. Membership fees are a powerful force in the company’s income statement. For example, through the first two quarters of the current fiscal year, membership fees were $1.5 billion.

Interestingly, Costco’s net income for the same period was $1.6 billion, or just slightly more than the membership fees. In a business with traditionally low profit margins, those membership fees truly set Costco apart from other retailers.

The quarter ended February 17 was especially strong for the company. U.S. same-store sales were 7.4% and 5.4% across all geographies. Overall, net sales increased 7.3% in the quarter. A bright spot was the 20% growth in company’s e-commerce sales.

Per-share profts in the quarter jumped 26% to $2.01, $0.32 better than analysts’ estimates. The earnings beat caused analysts to lift their fiscal year estimates to $7.95 per share, up from $7.69 just 30 days ago.

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The company continues to report same-store sales numbers that would make virtually any brick-and-mortar retailer jealous. The strong results have helped these shares post higher highs in eight of the last nine years.

Costco stock trades at 30 times the fiscal 2019 analysts’ estimate, which is a hefty multiple for a retailer. Thus, there is some downside should Costco disappoint in upcoming quarters. However, the stock seems to always sell at a premium, so investors have to be willing to buy on pullbacks.

Please note Costco offers a direct purchase plan whereby any investor may buy the first share and every share directly from the company.

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