Despite the success of Amazon, Costco Wholesale (NASDAQ: COST) is still one of the most followed retailers around.
Costco can make headlines by simply changing the menu at its lunch counter. Newspapers all over the country carried the story when Costco decided to stop selling polish sausages as hot dogs.
Hot dogs are big business at Costco, it sold 137 million of the legendary hot dog and soda combinations at its stores in 2017, The Bellingham Herald reported. That statistic alone provides an indication of the size and scope of Costco.
Costco is Huge
It is easy to forget but Costco has a huge following and a massive footprint worldwide. These numbers provided by our friends at Statista provide a glimpse of Costco’s immense size:
- There were 90.3 million Costco cardholders worldwide in September 2017, Statista, estimated. That number was up from 86.7 million in 2016, 81.3 million in 2015, and 76.4 million in 2014.
- If these numbers are correct Costco’s membership grew by around four million members a year for the last four years.
- There were 739 Costco Wholesale Clubs in 2017, Statista estimated.
- Costco’s largest footprint is in the United States where it had 514 clubs in 2017.
- Costco’s second largest market is Canada where it operated 97 clubs in 2017.
- Costco has a large presence in the United Kingdom with 28 clubs.
- Costco’s largest Asian market is Japan where it has 26 clubs.
- Costco has a big presence in Mexico with 37 clubs.
These numbers indicate that Costco’s footprint and buying power are vast even if it is often ignored investors. The question we need to ask now, is Costco making money?
Is Costco Making Money?
All those memberships and stores translated into a lot of money at Costco. Costco made a gross profit of $4.23 billion on revenues of $32.361 billion during 2rd Quarter 2018.
That gave Costco an operating income of $1.067 billion and a net income of $750 million for the period. The sales and memberships helped Costco generate a vast amount of cash in the form of a $2.105 billion operating cash flow and a $1.52 billion free cash flow for 2nd Quarter.
Costco’s resources are also immense, the company had $7.844 billion in cash and short-term investments and $5.877 billion in cash and equivalents on May 13, 2018. The company had accumulated assets of $39.605 billion as of 13 May 2018.
Is Costco’s Business Sustainable?
These numbers demonstrate that Costco’s business model of deep discounting combined with memberships is lucrative but is it sustainable?
Shopping patterns are changing dramatically thanks to the rise of Amazon (NASDAQ: AMZN) and Instacart. The preferred shopping position for tens of millions of people is sitting on the couch and touching an app.
Costco’s business model necessitates that everybody own a car and be willing to drive a big box store once a week or every couple of week to load up on stuff. What happens to Costco when half the population does not drive, and most people do their shopping from a phone?
Fortunately, Costco’s management has asked the question and tapped Instacart for help. Costco merchandise can be delivered by Instacart’s drivers which is a smart move. Costco is also participating in at least one other same-day deivery experiment Google’s Shopping Express.
Can Instacart Save Costco from Amazon?
A brilliant move for Costco right now would be to offer free Instacart delivery for all of its members.
That would head off Amazon’s Prime Now, and Walmart (NYSE: WMT) push into same day delivery. Offering free Instacart would make Costco the grocer of choice for many households. Having Instacart delivery other merchandise from Costco such as clothing, small appliances, etc. would give Costco a head start when department stores start entering the delivery sphere.
Making Costco more convenient is the best way to help Costco make more money. Giving Costco the reputation as the free Instacart place would make Costco the retailer of choice for America and Canada’s middle class.
The Wonderful Costco Dividend
With or without Instacart, Costco is still one of the best dividend stocks around. Its shareholders received a 57¢ payout on 25 May 2018. That dividend was up from 50¢ on March 2, 2018, but down from the 70¢ paid on May 26, 2017.
It is the dividends that make Costco one of the best long-term buy and hold stocks around. Even though I think Costco is overpriced; it was trading at $210.22 a share on 9 July 2018, it is still a great stock.
Those looking for a reliable retail stock will not go wrong with Costco. This company has the ability to generate a lot of cash and pay a great dividend. Instacart might help Costco make even more money in the future.