Market Mad House

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

Grocery Wars

Costco’s Sales Approach $130 Billion

Costco Wholesale (NASDAQ: COST) has grown into a retail behemoth that might soon rival Amazon (NASDAQ: AMZN) in the size of its revenues.

Costco reported revenues of nearly $130 billion; $129.02 billion to be exact, for August 31, 2017. That last revenue figure for Amazon; that from June 30, 2017, was $150.12 billion.

What is truly extraordinary is that Costco’s revenue grew by $5.75 billion during summer 2017. Costco reported $123.28 billion in revenues in May and $129.03 billion in August.

Equally impressive is the revenue growth from the year that ended on 31 August 2017; which was $10.31 billion, over half of which occurred in just three months. Costco reported $118.72 billion worth of revenues in August 2016.

Is summer the New Christmas at Costco?

These numbers point to a fascinating new development at Costco; and perhaps other retailers, summer not the winter holidays is now the most important sales quarter.

Costco’s revenues only grew by $1.59 Billion during the three months that contain the winter holidays (November 2016, December 2016 and January 2017). They grew by $5.75 billion or almost five times as much over the summer as noted above. Costco reported $119.60 billion in revenues in November 2016 and $121.19 billion in February 2017.

That indicates the holiday sales season is no longer the revenue bonanza it once was for American retailers. That certainly casts serious doubt on the winter hiring frenzy at retailers like JC Penney (NYSE: JCP) and the Bon Ton Stores (NYSE: BNT).

The changes Amazon has made to the retail business seem to be deeper and more profound than many realize. Old truths like the Christmas rush are no longer certainties.

Is it the Age of Amazon or the Age of Costco?

Such figures also cast serious doubt on the popular notion that we are entering the age of Amazon. Some other retailers seem to be thriving in spite of the Everything Store’s breakneck growth.

Costco is even delivering a level of growth that’s every bit as impressive as Amazon’s. The present volume of Costco’s growth almost rivals that of Amazon’s. During the last quarter for which we have figures; 2nd Quarter 2017, Amazon’s revenues grew by $7.55 billion. Costco’s revenues grew by $5.75 billion last quarter. Amazon reported $142.75 billion in revenues in March 2017 and revenues of $150.12 billion in June 2017.

Why Costco May have a Far Better Business Model than Amazon

What’s more impressive is that Costco achieved that revenue growth with one website and brick and mortar stores in a handful of countries including the U.S., Canada, Jpan, and Australia. Amazon has vast diversified operations that include Amazon Web Services, a movie studio, Amazon Prime, dozens of lines of private label products, Zappos, Whole Foods, and far more.

It appears that Costco has a far better business model than Amazon. It can generate vast amounts of revenue profits with a limited number of superefficient club stores.

Currently, there are only around 514 Costco stores compared with around 1,816 Targets. Target (NYSE: TGT) reported revenues of just $69.58 billion in July 2017, yet Costco’s revenues exceeded that number $59.44 billion. That makes Costco a far better discounter than Target and a grave threat to Target’s future.

Is Costco the Most Profitable Retailer?

Strangely enough, Costco is far from the most profitable retailer around. It reported a profit margin of 2.17% on August 31, 2017. Target reported a profit margin of 4.09% on 31 July 2017 which indicates why profit margins are poor means of gouging retailers’ moneymaking capacities.

Costco is making a lot of money; it reported an income of $2.679 billion on August 31, 2017. That was a substantial increase over the $2.35 billion reported a year earlier. Yet it was still lower than the $2.778 billion in income Target reported on 31 July 2017.

What’s more impressive is that Costco is generating a fantastic amount of float for a retailer. It had $5.725 billion in cash and short-term investments and assets of $35.63 billion on May 31, 2017. Costco also managed to achieve $4.723 billion in cash from operations on May 31, 2017.

This gave Costco a market capitalization of $68.86 billion and an enterprise value of $67.79 billion on October 18, 2017. That makes a moneymaker but not a value investment because the $157.50 share value reported on 18 October was simply too high for my tastes.

Yet is a great dividend investment there was a payout of 50¢ on August 16, 2017. Costco is also a great growth investment; with a return on equity of 21.93% on May 31, 2017.

Yes, Mr. Market, Costco is Amazon Proof

There is one obvious conclusion we can draw from all this, Costco is Amazon proof. It is capable of massive revenue growth in the face of relentless growth and aggressive competition on the part of Amazon.

There might be other factors driving some of the growth. Such as the recent wave of disasters in the United States which included hurricanes Maria, Harvey, Ophelia, and Irma, and the catastrophic fires in California. The nonstop media coverage generated by these events and the horrors in Puerto Rico might be the best advertising Costco, and its vast stocks of supplies can get.

Other factors include the growth of digital media which limits advertising exposure and benefits Costco’s no-advertisement business model. Amazon’s dominance of segments like clothing helps Costco because it limits shopping at competitors like Walmart (NYSE: WMT) that rely heavily on apparel sales.

Costco Cashing in on Disasters

Costco is moving to cash on disasters with a year emergency food kit that sells for $999.99, The Detroit Free Press reported. The “kit” reportedly contains 100 one-gallon cans of wheat, rice, granola, apples, bananas, peaches, strawberries, carrots, onions, sugar, salt, corn, beef, chicken, milk, and other staples.

Costco sells several other food kits including larger ones for $3,999.99 and $5,999.99. The major market for such kits is “working people who fear for their lives” retail expert Kenneth J. Dalto told The Free Press. Dalto thinks hysterical news reporting about North Korea nuclear weapons and President Trump’s reactions to them are also driving sales of items like food kits.

No matter what is driving its’ sales, Costco would still be a pretty good stock to own even though it is overvalued. Persons that add Costco to their “retirement survival kits” (stock portfolios) will not go wrong.