Costco: The Winner That Keeps on Winning

Taking a Look at Costco (NYSE: COST), Weekly Activity, & Portfolio Update

A Wholesale Success in the Stock Market

Costco (COST) has held a special place in my portfolio since I began investing, standing out as one of my favored businesses. I visit the store weekly, benefitting from the substantial savings and the convenience of finding everything I need in one place. Beyond its customer appeal, an examination of COST's fundamental business aspects reveals robust strength and sustained excellence. Following the recent release of their earnings, let’s dive deeper into their impressive performance to understand the intricacies of their continued success:

Financial Highlights:

• Fourth Quarter Net Sales: $77.43B, marking a 9.4% uptick from $70.76 billion in the previous 16-week fourth quarter.

• Fiscal Year Net Sales: $237.71B, illustrating a 6.7% ascent from $222.73B in the 52-week fiscal year of 2022.

Visual of comp sales:

Net Income Details:

• Fourth Quarter: $2.160B ($4.86 per diluted share), compared to $1.868B ($4.20 per diluted share) in the last 16-week fourth quarter.

• Fiscal Year: $6.292B ($14.16 per diluted share), compared to $5.844B ($13.14 per diluted share) in the prior 52-week year.

Strong Sales Figures

COST reported remarkable net sales of $77.43B in the 17-week fourth quarter, showcasing a 9.4% increase from $70.76B in the same period last year. This upward trajectory is also reflected in the fiscal year results, with net sales reaching $237.71B, a 6.7% surge from the previous fiscal year’s $222.73B.

Impressive Revenue & Membership Fees

Total revenue also experienced significant augmentation, amounting to $78.93B, compared to last year's $72.09B. Membership fees, a crucial revenue component, realized a climb to $1.51B in Q4 2023 from $1.33B in Q4 2022.

Elevated Cash & Equivalents

The company witnessed an elevation in cash and cash equivalents, starting the fiscal year at $10.20B and closing at $13.70B. The increase in cash reserves demonstrates the company's robust liquidity position, offering opportunities for future investments and operational enhancements (love to see this).

Diligent Management of Assets & Liabilities

COST has managed its assets and liabilities meticulously. Total current assets are valued at $35.88B, and total assets at $68.99B as of September 3, 2023. Concurrently, total liabilities stood at $43.93B, reflecting sound financial health and efficient resource allocation.

COST's recent financial disclosures illustrate a flourishing enterprise, characterized by enhanced sales, substantial revenue, and well-managed assets and liabilities. These financial results are a testament to COST’s relentless pursuit of growth and its enduring commitment to delivering value to its shareholders and customers alike.

The success of COST is undoubtedly attributed to its strategic operational maneuvers, extensive product range, and unwavering focus on customer satisfaction. As COST continues its trajectory of expansion and enhancement, it remains a pivotal player in the retail sector, setting benchmarks for operational excellence and financial robustness.

Costco’s Global Footprint

COST stands as a global retail titan, operating an impressive portfolio of 861 warehouses. These are strategically spread across several countries to maximize market penetration and consumer reach. The United States and Puerto Rico host the majority with 591 warehouses, followed by Canada with 107, and Mexico providing home to 40.

In Asia, COST has marked its presence with 33 warehouses in Japan, 18 in Korea, 14 in Taiwan, and five in China. The United Kingdom contributes 29 to the count, while Australia holds 15. Europe sees its share with four in Spain, two in France, and one each in Iceland and Sweden. Additionally, New Zealand also hosts one warehouse.

Beyond its expansive physical footprint, COST is embracing the digital economy by operating e-commerce sites in eight countries: the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia.

This multifaceted presence underscores COST's commitment to bringing its range of products and value-driven approach to consumers around the world, adapting to varied market needs and consumer preferences, and solidifying its status as a global retail powerhouse.

Here is a visual:

Excellent Management Team

COST's management, with its prudent decision-making and strategic foresight, has been effectively optimizing the company's capital structure and allocating its resources, creating shareholder value. In Q4 2023, the company executed a stock repurchase program, buying back stocks worth $230M. This strategic move resulted in the acquisition of approximately 433,000 shares (part of their announced $4B buyback in the beginning of the year). COST has a history of making stock buybacks, the continued repurchases shows management’s confidence in the company's intrinsic value and future prospects, aligning with the objective of enhancing shareholder wealth by improving stock value.

Additionally, COST has demonstrated its commitment to growth and sustainability through substantial investments in capital expenditure, totaling $1.56B in the same quarter. Capital expenditure is crucial for maintaining operational efficiency and fostering innovation, laying down the foundation for long-term success and profitability. This sizable investment in capital projects reflects the company’s ambitious approach to expanding its operational capabilities and market reach, aimed at maintaining a durable competitive edge in the rapidly evolving retail landscape. By balancing stock repurchases and significant capital expenditures, the COST management team has been steering the company with a balanced and sustainable approach, fostering innovation and growth while delivering value to its shareholders.

My Take

When I began my journey in the investment realm, COST was among one of my very first investments, and it has proven to be exceedingly rewarding. It now claims a spot in the top 10 of my portfolio, a consequence of my strategic decision to progressively enhance my stake in the business. I’m of the firm belief that for investors who harbor a long-term perspective and value patient capital growth, this dividend grower can act as a stable foundation for their portfolios.

Moving forward, COST's membership fees and growth rate are crucial aspects to monitor. A noteworthy point, often overlooked by many investors, is COST's historical approach to counteracting inflation by elevating their membership fees approximately $5 every 5 to 6 years. The management’s subtle stance on this practice did catch me by surprise, however, if implemented, this could yield substantial benefits for the company. With COST's renewal rate steadfast at around 90%, their performance is commendable. It’s also imperative to witness a consistent upswing in membership growth. COST’s global expansion is poised to significantly augment membership growth, a trend currently in motion. Investors would do well to also anticipate a special dividend, historically dispensed every 4 to 5 years, and projected to be around $12 per share, following the prevailing trend.

On a personal note, I plan to consistently increase my holdings in COST. However, given the ongoing recovery from a monumental bear market, my focus is predominantly on the existing growth entities within my portfolio. COST is evolving into a behemoth in the consumer staples sector, emerging as the quintessential one-stop solution for a myriad of needs. It’s not merely about the economical bulk purchases of groceries; it extends to pharmaceuticals, optical services, and automotive needs. And of course, who could overlook the iconic $1.50 hotdog that has become synonymous with the Costco experience?

Weekly Activity (September 25th-29th)

• 3 shares of Realty Income (O)

• 20 shares of Lemonade (LMND)

My Portfolio

I find it impossible to overlook the significant sell-offs involving REIT Realty Income and Lemonade. September has proved to be a difficult month, with Q2 results dealing a heavy blow to my portfolio, particularly seeing substantial declines in assets like Upstart, Magnite, and Lemonade. Compounding this is the limitation in my portfolio performance visibility, which extends only until May of 2023, often presenting inaccurate averages.

Nevertheless, my concentration will be primarily on Realty Income, Boston Omaha, VOO, and Relay Therapeutics, with consideration for potentially adding more Lemonade. The recent downturns underscore the importance of vigilance and strategic recalibration, and these businesses will be at the forefront of my focus as I navigate through the uncertain market conditions.