Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Is Costco’s Growth for Real?

There might be serious problems at value icon Costco Wholesale (NASDAQ: COST); revenues at the company dropped by $10.491 billion during 3rd quarter 2017.

Costco generated $42.3 billion in revenues during 2nd Quarter 2017 and $31.809 billion during 3rd Quarter. Strangely enough, the difference in revenues is probably good because it reflects membership payments. Costco might have been able to make $10.491 billion in float off of membership payments during 2nd Quarter 2017.

Costco is certainly doing well right now, Stockrow gave it a revenue growth rate of 13.20% and an operating income of $951 million for 3rd quarter 2017. That led to $925 million in earnings before taxes and a net income of $640 million.

Costco is Growing like Crazy

America’s club store is running a lot of cash through its till, Costco reported $2.006 billion in operating cash flow for 3rd quarter 2017, up from $1.834 billion in the second quarter. That produced a free cash flow of $1.186 billion for 3rd quarter 2017.

Stockrow gave Costco a net income growth rate of 17.43% and earnings per share growth rate of 17.74%, so it is easy to see why Charley Munger loves Costco. The company also had a lot of value in the form of $6.855 billion in cash and short-term invests on 26 November 2017, up from $5.779 billion in September. That was augmented by $39.378 billion in assets up from $36.347 billion in 2nd Quarter.

So yes, Costco is growing and it is generating more float than ever. The $100 billion question here is how much longer than growth continue?

Costco is capable of Tremendous Growth

The available data indicate that Costco’s growth might continue for a long time. Sales at Costco Wholesale increased by 3.8% in 2017, slightly less than the 4% in 2016, The Motley Fool contributor Demitrios Kalogeropoulos noted.

That growth occurred in both brick and mortar and online; foot traffic at Costco stores increased by 5.9% in 2017. That indicates more consumer confidence and more people willing to pay the Costco membership fee.

A more important figure was a 40% increase in online sales at Costco. Not as good as Walmart’s (NYSE: WMT) but solid. This demonstrates that Costco has a strong brand; because its’ management has not engaged in the kind of massive e-commerce push going on at Walmart and Amazon (NASDAQ: AMZN). Loyal customers are going to without any prodding.

The two most important figures at Costco were an increase in Executive Memberships and the member renewal rate. They increased by 246,000 rising to 91.5 million in the 3rd quarter, according to Kalogeropoulos. More importantly, 90% of Costco’s customers renewed their memberships for 2017.

Those numbers are vital because membership fees give Costco float, and the membership provides an incentive to shop at Costco. The company is retaining customer loyalty despite the convenience of Amazon.

Is Amazon Prime a Better Deal than Costco?

The growth is impressive because the current cost of an Executive Membership at Costco is $110 a year. That’s actually higher than the annual cost of an Amazon Prime membership $99 a year or $10.99 a month. The $60 Costco Goldstar membership is still cheaper than Prime.

Prime is the biggest threat to Costco; because it offers a similar shopping experience, without the hassle of going to Costco and lugging all that stuff home. An even greater dilemma for Costco is that can Prime can reach customers who live nowhere near Costco stores such as rural residents. It can also serve people without cars, who are a growing segment of the population.

Around 31% of American 19-year olds did not have a driver’s license in 2014, a study by the University of Michigan’s Transportation Institute found. That number was a 21% increase from 1983.

Costco is responding to those trends it is offering same-day grocery delivery through Instacart and Google Express in markets such as Denver. The company even claims it can offer one hour grocery delivery in some zip codes with Instacart’s help. Like Amazon and Walmart, Costco is also offering free two day delivery on many products.

Costco is the Best Dividend Stock in America

It looks as if Costco is well-positioned to deal with the future and ward off the Amazon challenge. More importantly, Costco seems well positioned to survive and make money in America in which a large percentage of the population may no longer drive.

That’s good news for investors because Costco is a great income stock. Its investors enjoyed three 50¢ dividends, one 45¢ dividend and one $7 super dividend in 2017, NASDAQ reported.  Costco shareholders took home $8.95 in dividend income in 2017.

That makes Costco the best dividend stock in America today, and worth the $188.95 share price reported on 11 January 2018. Charley Munger is right, if you need income in your portfolio buy Costco, even at the higher price you will make money from it.