Costco offers investors the highest near-term cash flow visibility in the retail defensive sector because of its membership fee model and high-quality customer base.
The loss-leader capabilities of Costco's business model should continue to drive disproportionate market share gains over the long term.
In contrast to its big-box industry peers, Costco has international operations that generate returns above its cost of capital. The warehouse club concept has shown promise in the U.K., Taiwan, Korea, and Australia, suggesting attractive global growth potential. Read more
There is little room for further household penetration because Costco already has more than 70 million members; historical sales and earnings growth forecasts may not be sustainable.
If Amazon decides to invest heavily behind its Pantry concept, the competitive environment could become more intense for Costco.
New club openings in existing markets could lead to cannibalization of sales from older locations. Securing suitable real estate options for 140,000-square-foot warehouse clubs can be a challenge in urban areas. Read more
From a capital-allocation perspective, we think Costco's management has been very disciplined. Although the company continues to roll out new stores, it has also been able to sustain excess returns on capital and generate ample free cash flow. Costco Read more
At the end of fiscal 2013, Costco operated 451 membership warehouse clubs in the United States, 85 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, 9 in Taiwan, Read more