3 Reasons We’re Long Costco (COST)

Mar 05, 2022

It takes a special kind of company to get me excited about purchasing new cleaning supplies…in bulk, no less!

But I’d be lying if I said I didn’t love it.

On a Sunday afternoon about once a month, I get ready.

I clear out my hiking gear from the trunk of my vehicle to make way for my impending haul.

I conduct a quick inventory of food and supplies in my house.

And most importantly, I plan ahead to ensure I’ve worked up an appetite.

Where am I going?

Costco, of course.

The membership-based retailer is basically a suburban theme park on the weekends. High-quality products. Free samples. $1.50 hot dogs.

Even from an investor perspective, Costco is extremely consistent.

Not only does its membership model ensure a recurring stream of revenue, but the company posts monthly sales results, meaning there are no big quarterly surprises.

And the January report was telling.

Pandemic-onboarded consumers really are sticking around

The January sales report confirmed that Costco sales are continuing to grow at an elevated rate. Comps for the month were +14% higher YoY. This is on top of January 2021, where comps were +18% higher YoY. To give perspective, prior to the pandemic, sales typically increased by around +8%.

This level of retention is impressive. Why are consumers sticking around?

Costco provides a superior retail experience

When we check consumer happiness levels for physical retail peers, including Walmart, Sam’s Club, and Target, Costco clearly leads the pack with happiness levels at 71% positive.

Perhaps even more impressive is how much consumers love Costco’s private label, Kirkland Signature. Consumer happiness levels are 80% positive, driven by the brand’s perceived high quality.

By the end of 2021, Kirkland brand sales reached $59 billion.

In addition, Costco’s in-store experience leverages product discovery and bulk savings.

In fact, mentions of shopping in a Costco store have increased by +15% YoY as consumers resume normal, pre-pandemic behavior.

But trend analysis suggests there’s more to it, at least in the near term…

Consumer macro trends are likely to bolster Costco demand

Consumers seeking low prices and savings are turning to Costco in the current inflationary environment.

The Consumer Price Index (CPI) reported that year-over-year inflation rose to 7.5% in January 2022, the highest rate in 40 years.

And the consumer reaction is palpable.

Inflation fears have increased by more than 360% YoY!

Costco has plenty of tools in its arsenal to combat inflation

First: Costco’s membership is sticky.

The company’s renewal rate in the U.S. and Canada is 92%. That’s extremely high!

Not only does this contribute directly (and annually) to the company’s bottom line, but it also showcases the company’s pricing power.

Costco can easily turn the dial up and implement a small increase in membership pricing if it needs to.

Second: Costco’s selective product offerings and its owned-brand approach translates to lean inventory and buying power.

Costco carries 4,000 SKUs (stock keeping units) per warehouse, carefully selected to maximize value to consumers. Retail peers Walmart and Target support 120,000 and 80,000, respectively. Much less lean.

In addition, Costco’s prominent Kirkland Signature brand means it is reliant on fewer suppliers, so it has more control and visibility into any potential bottlenecks or constraints.

Final thoughts

Short-term, rising gas prices may push more consumers to Costco’s gas pumps. While this translates to more sales, it may squeeze margins.

But long-term, the more savings Costco can provide customers, the more likely they are to stick around and continue shopping.

Bottom line: This is a solid name with happy customers. We’re long. And I’m ready for my next trip.

Megan Brantley
Head of Research, LikeFolio