Five Reasons to Buy Costco

07/30/2020 5:00 am EST


Tony Sagami

Editor, Weiss Ratings LLC's Weiss Ultimate Portfolio

I seldom make it out of Costco (COST) without dropping $400, or more. That’s because the deals are just too good to pass up. If you’re a Costco shopper, you know exactly what I’m talking about, suggests Tony Sagami, editor of Weiss Ultimate Portfolio.

And there’s a good chance that you are a Costco shopper — 86 million people have Costco memberships. The company took the big box concept and turned it into an unparalleled retail success story.

Costco stores are stark but packed to the gills with top-quality merchandise at amazing prices. By focusing on quality, value and volume at the expense of price, Costco consistently gives shoppers unbeatable deals on hundreds of everyday needs.

Costco opened its first store in 1976 and has 785 stores today. It is the second largest retailer in the world, second only to Walmart (WMT).

And it has richly rewarded its shareholders. Better yet, those rich shareholder rewards aren’t going away as it has proven to be almost immune to the coronavirus pandemic and one of the best recession-resistant stocks on the planet. Here are five reasons to  buy Costco today:

Reason No. 1:

Growth, growth, growth; Costco has steadily increased its store count over the years and that has translated into an even steadier growth in revenues and profits.

Over the last 12 months ending May 31, 2020, Costco pulled in a whopping $160.7 billion of sales, a 7.5% year-over-year increase. That’s impressive, but it’s just business as usual for Costco.

There are very few retailers that have seen their business increase because of the pandemic and Costco is one of them. That recession-resistant quality makes Costco an extremely reliable growth story.

Reason No. 2:

Costco has $3.4 billon (and growing) in recurring revenue. It may surprise you, but Costco makes most of its money from annual membership fees, not from selling merchandise. In fact, Costco essentially sells things at a razor-thin profit margin and relies on membership income for all its profit.

At the end of 2019, Costco had 53 million paying members. Costco reported $3 billion of profit last year. $2 billion of that profit came from membership fees.

Get this: Membership signups are growing at a very steady clip. In 2019, membership revenue increased by 10% to $3.4 billion. Best of all, Costco has a sky-high membership renewal rate that has consistently been in the 90%-plus.

Reason No. 3:

Its e-commerce business is growing like mad. Costco isn’t going to catch up to Amazon (AMZN) for internet sales, but it is slowly and quietly growing into a major e-commerce vendor and is now the 15th largest e-commerce vendor in the U.S. with $4.2 billion of sales in 2019.

Reason No. 4:

Americans aren’t the only ones who like bargains. Out of Costco’s 785 stores, 543 are in the U.S. and Puerto Rico. The balance forms Costco’s solid global footprint, with stores in countries like Canada (100), Mexico (39), the United Kingdom (29), Japan (26), Taiwan (13), South Korea (16), Australia (11), Spain (2), Iceland (1) and France (1).

The Seoul, South Korea store pulls in more revenue than any Costco store in the world and the second highest revenue warehouse worldwide is located in Taipei, Taiwan. Costco has yet to open a store in China but has partnered with Alibaba (BABA) to sell Costco’s in-house brand, Kirkland Signature.

Reason No. 5:

Costco offers several products and services that Amazon can’t offer without a physical location like gasoline stations, pharmacy prescription centers, eye glasses shops and tire shops. It just isn’t financially practical to ship bulk-sized — like 50-pound bags of rice and 48-roll packages of toilet paper — on a door-to-door basis.

Costco has moved to the top of the Weiss Performance Ranking and is a stock you should buy right away. By the way, you’ll have good shareholder company. Warren Buffet via Berkshire Hathaway (BRK.B) owns 1%, or 4.3 million shares, of Costco. His partner, Charlie Munger, personally owns 184,000 shares worth $45 million and is a director of the company.

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