Costco: The Best in the Business

01/07/2016 7:00 am EST

Focus: STOCKS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Our latest new recommendation is the second-largest retailer in the world, boasting a $73 billion market cap and $116.2 billion in annual sales, explains Nicholas Vardy, editor of The Alpha Investor Letter.

Founded in 1976, Costco (COST) operates 690 warehouses, with more than 2.3 million transactions per day. Costco’s 200,000 employees oversee more than 2.3 million transactions per day.

Costco is unique for several reasons. First, you’ll never find anything cheaper than you do at Costco. It is the ultimate—and most trusted—arbiter of low prices.

Low-margin retail is a tough business. So why is Costco different? Its warehouse model is cheap to run. Management is also obsessed with keeping costs down.

In addition, Costco only stocks the fastest-selling models, sizes, and colors of products—about 3,500—significantly fewer than, say, Wal-Mart’s (WMT) 25,000.

With its focus on membership, Costco has one of, if not the best, business models in the retail industry.

Costco doesn’t make much money selling merchandise. Sales margins usually hover right around 0.45%. Instead, almost all of its profits are directly attributable to membership fees.

Today, Costco has over 88 million members representing 44 million households. The annual membership fees ($55-$110 per year) alone generate cash in excess of $2.6 billion per year.

The membership model provides a steady and predictable base of cash flow every year. And the 88% renewal rate worldwide confirms that customers are happy to stick with Costco.

As a result, investors can be certain that Costco will generate a profit no matter what the economic conditions.

Meanwhile, Costco still has plenty of growth ahead of it. Over the last ten years, Costco more than doubled sales, growing at a 9.1% annual rate.

Costco reinvested $5 billion of its $9.7 billion in cash flow to build new stores and upgrade its existing warehouses over the last three years.

With only 208 locations in the rest of the world and 90 of these non-US stores in Canada, Costco is still in the early stages of its international growth. In my view, this is a rare opportunity to buy on a dip.

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