Investing in Costco

Costco Wholesale Corporation (NASDAQ: COST) is a chain retail store in the United States. Most Costco stores require people who shop at them to have a membership (or to be a guest of such a member) with the Costco corporation. In the past year, Costco stock has risen approximately $7 per share and trades for $88.69 as of April 28th, 2012. Costco pays its shareholders a $0.96 (1.10%) dividend per year and has a market capitalization of $38.49 billion. Costco is the largest membership club chain of retail stores in the United States and the seventh largest retail store in the world.

According to the company’s most recent conference call, held on February 29th, 2012, Costco had a very strong second quarter of 2012, seeing a 10% ($22.5 billion) sales increase along with a 14% earnings per share increase since last year’s second quarter ( CFO Richard A. Galanti discussed two locations that the company opened in Japan in the most recent quarter and reported that these locations make the grand total of Costco locations worldwide up to 600. The second quarter of 2012 saw a 2.4% increase in the size of the average transaction; in other words, people who shop at Costco are, on average, purchasing more in each trip. Additionally, there was an average frequency increase of 5.2%, meaning that these transactions are occurring at a greater rate than they were before.

In the past year, Costco earned $459 million in membership fees, up from $426 million last year in the second quarter (an 8% increase in membership fee income). Additionally, new member sign-ups in the second quarter totaled to an 11% increase year-over year. Galanti reported this strong increase was due largely in part to the success the company has seen with international openings and the company’s performance in Asia and Australia during the past year. Furthermore, the company’s Gold Star membership (individual) was up 400,000 from the first quarter 2012. Including a slight decrease in the business primary membership, the company gained approximately 300,000 in memberships since the first quarter. Furthermore, the company enjoyed a high membership renewal rate, particularly in the United States and Canada. Business membership renewals were up 93.5% since the end of the first quarter, and Gold Star renewals were up 88.4%, resulting in a total 89.4% renewal rate, up from 89.2% last quarter.

Back in October of 2011, the company announced it was increasing membership fees in the United States and Canada ( These changes will affect people who are renewing their memberships and becoming new members to the company. Gold Star and Business fees are up $5 to $55 each, and executive memberships are up $10 to $110. Yet, these fee increases were not expected to hurt Costco customers, as many of them come from six-figure incomes and can handle the fee increase. Therefore, the increased membership fees did not have a negative impact on the company’s reputation or profitability. Costco also announced that the 2% reward that is available with the Executive Membership increased from $500 to $750 per year for eligible purchases, making a $4-$5 million yearly impact.

Galanti also commented that reported industry expense was approximately the same as it was this time one year ago, so there were no significant increases or decreases on that front. However, operating income in the second quarter was up $48 million from $596 million last year, making the total $644 million this year. Costco also spent $145 million in the second quarter on stock repurchases, down from $173 million in the first quarter.

Costco faces competition from other large membership warehouse companies such as BJ’s Wholesale Club (NYSE: BJ) and Sam’s Club. Like Costco, BJ’s increased its annual membership last year by $5, now totaling $50. However, because BJ’s customer base is of a slightly lower end demographic than Costco’s, this increase in membership fees was more of an annoyance to BJ’s customers than it was for Costco’s customers. Customer satisfaction is high for both companies, though BJ’s does have the advantage of accepting manufacturer coupons. Sam’s Club allows for cheaper membership fees ($35 per year for businesses and $40 per year for individuals) that includes a free membership card for another household member. Furthermore, Sam’s Club members can enjoy opening hours as early as 7 a.m. Monday through Saturday. However, Sam’s Club is second behind Costco in total sales volume, meaning that its 602 locations don’t give it an extra push over Costco.

The bottom line is that Costco is a solid investment. It is a strong company whose stock does not carry with it a great deal of risk. Over the past year, Costco stock has stabilized significantly, meaning that investors should feel safe investing in it. As one Seeking Alpha contributor points out, though Wal-Mart (who owns Sam’s Club) has a higher market capitalization and price-earnings ratio than Costco, Wal-Mart carries more debt than Costco ( Furthermore, Costco, though a stable stock, has “high growth potential,” (Frank) making it a sound investment.