Costco Wholesale CorporationCOST

Morningstar Rating

Stock Research and Analysis

by R. J. Hottovy, CFA

We view Costco as a relevant retail concept in light of the difficult consumer environment. By offering a number of leading brand-name products at rock-bottom prices, the firm appears poised to attract new members and take share from other retailers as consumers look for ways to stretch their budgets. Read more

Bulls Say

Despite Sam's Club's larger store footprint, Costco dwarfs it in sales and volume. In fiscal 2009, sales per square foot at Costco's stores averaged $965, compared with roughly $586 at Sam's Club.

Costco pays its employees generously and offers attractive benefits and health-care packages. Although this is costly on the surface, the firm is reimbursed handsomely with a low employee turnover and greater workforce productivity. In fact, Costco generates more than $500,000 in sales per employee.

Costco offers customers a constantly changing mix of high-priced merchandise that typically includes jewelry, furniture, or featured electronics.

By targeting a more affluent customer base with its upper-end merchandise mix, Costco effectively avoids provoking price wars with rivals--an excellent strategy, especially when competing with retail bellwether Wal-Mart. Read more

Bears Say

Sam's Club and BJ's Wholesale BJ are increasingly focused on serving small businesses and individuals, respectively. Increased focus from its primary competitors could threaten Costco's dominance in wholesale retailing.

New club openings in existing markets could lead to cannibalization of sales from older locations, which could temper store productivity.

Costco is much more productive and offers slightly differentiated merchandise, but Sam's Club could try to replicate the firm's business model and leverage its expansive international distribution infrastructure.

Ancillary businesses could distract the firm from its core operations and also lead to uneven quarterly sales and profitability. Read more

Strategy

Costco is focused on developing ancillary businesses, including gas stations, optical services, pharmacies, and other services, to boost sales and promote more-frequent customer visits. Management believes Costco can reach 1,000 clubs worldwide before approaching saturation. Read more

Management

Costco's corporate stewardship is excellent, with one of the best management teams in retail. Founders James Sinegal and Jeffrey Brotman are still intimately involved in the company they built in 1983. Sinegal is president and CEO, and Brotman is chairman of the board. Read more

Profile

Costco Wholesale operates membership warehouses that offer a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories at low prices. Read more

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