Tell Me More About Costco Wholesale (NASDAQ:COST) Stock

Costco stock, COST stock, COST stock news

*Article updated on December 13, 2020*

To start off our analysis of the opportunity the lies in Costco Wholesale Corp (NASDAQ:COST), here are some of the basic details every investor should know before investing in Costco stock:

Sector: Consumer Retail Trade
Industry: Specialty Stores
Market Capitalization: $164.72 billion
Shares Outstanding: 441.2 million
Headquarters: Issaquah, WA
Company Established: 1985
Current CEO: W. Craig Jelinek

Costco Wholesale Corp (NASDAQ:COST) in Detail

Costco operates retail membership warehouses and offers its members low prices on a limited selection of private-label products in a wide range of categories. The company believes this business strategy will produce high sales volume and rapid inventory turnover. The high sales volume and turnover, combined with other operating efficiencies achieved by volume purchasing, efficient distribution, self-service warehouse facilities, is what enables Costco to operate with significantly lower gross margins than its competitors. Costco is typically able to sell inventory before it is required to pay for said inventory. The company buys its merchandise directly from manufacturers and then either routes the merchandise to consolidation points, or depots, or ships the merchandise directly to Costco warehouses.

The company’s goal is to provide Costco members with a wide range of premium merchandise at prices that are consistently lower than competitors offer. The average warehouse space is approximately 146,000 square feet, and the warehouses operate on a 7-day and 70-hour week. Costco carries, on average, approximately 3,700 active stock keeping units (SKU) per warehouse and the company averages between 8,000-10,000 SKUs online via the company website at Costco’s e-commerce operation provides additional products that cannot be found in physical warehouses. In 2020, net sales from e-commerce represented 6% of Costco's total net sales.

Costco generally accepts returns of merchandise in order to maintain high levels of member satisfaction. The company offers merchandise from all of the following categories: Food & Sundries, Hardlines, Fresh Foods, Softlines, and Ancillary.

Gold Star memberships are available to individuals, and Costco business memberships are limited to businesses. The company’s membership renewal rate has been reportedly 91% in the U.S. and 88% in Canada to date in 2020.



In 2020, Costco had 156,000 full-time employees and 117,000 part-time employees, for a total of 273,000 employees. This number is significantly greater than Costco's total employee count in 2018, beating it more by more 28,000 total employees. Approximately 17,100 Costco employees are union employees. Costco has reported that the company considers its employee relations to be good at this time.

The specialty retail trade industry that Costco operates as a part of is highly competitive based on price, quality, location, distribution strategy, and quality of customer service. Costco competes against supermarkets, regional wholesalers, and specialty stores, such as Walmart (WMT), Target (TGT), Kroger (KR), Amazon (AMZN), BJ’s Wholesale Club )BJ), and many others

Costco is highly dependent on the company's U.S. and Canadian operations, which represented 29% of its total net sales in 2020. The continued impact of the Covid-19 pandemic has proven to be extremely volatile and unpredictable for companies in all sectors. Some of the factors and uncertainties include: severity and duration of the pandemic, evolving macroeconomic factors, pace of recovery when pandemic "ends," and the long-term impact of the Covid-19 pandemic.

As omnichannel retailing is evolving at a rapid pace, Costco must continue keep up with new developments of their competitors, which could potentially be capital intensive. Members are also increasingly using mobile phones, tablets, and computers to purchase from Costco which should continue to require Costco to unveil rapid technology updates in order to keep up.

Costco Stock 2020 Highlights

Costco opened 16 new warehouses, including three relocations: nine new warehouses in the U.S., three new in the "other international" segment, and one net new location in the Canadian segment, compared to 25 new warehouses, including 5 relocations, in 2019.

Net sales for Costco increased by 9% year-over-year to $163,220, driven primarily by a 8% increase in comparable sales and sales at new warehouses opened in 2019 and 2020. SG&A expenses as a percentage of net sales decreased three basis points primarily due to leveraging increased sales and a partial reversal of the previous year's tax assessment. These benefits were partially offset by incremental wage adjustments and sanitation costs as a result of the Covid-19 pandemic.

Membership fee revenue increased 6% year-over-year up to $3,541, primarily due to increased membership sign-ups at existing and new warehouse.

Gross margin percentage increased 18 basis points, driven primarily by certain core merchandise categories, partially offset by certain ancillary and other businesses, which were negatively impacted by Covid-19 related closures and restrictions.

Costco's net income increased 9% year-over-year up to $4,002, or $9.02 per share compared to $3,659, or $8.26 per share in 2019.

In February 2020, Costco announced the acquisition of a 35% interest in Navitus Health Solutions. Navitus Health Solutions is a pharmacy benefit manager. In March 2020, Costco announced the acquisition of Innovel Solutions. Innovel Solutions is a company that provides final-mile delivery, installation and white-glove capabilities for big and bulky products across the U.S. and Puerto Rico.

In April 2020, Costco issued $4,000 in aggregate principal amount of Senior Notes, some proceeds of which were used to repay $1,500 of Senior Notes.

Also in April of 2020, the Costco Board of Directors approved an increase in the quarterly cash dividend payment from $0.65 to $0.70 per share of Costco stock.

Who is the Chief Executive Officer, or CEO, of Costco Wholesale Corp (NASDAQ:COST)?

Mr. W Craig Jelinek has been the president and Chief Executive Officer of Costco Wholesale Corp (NASDAQ:COST) since February 2010 and January 2012, respectively. Mr. Jelinek served as the Chief Operational Officer of Costco from February of 2010 through December of 2011. Jelinek joined Costco in April of 1984, when he first served as the Senior Vice President of Operations in the company's Northwest region. Mr. Jelinek is currently paid a salary of $698,079 annually, with a total compensation (including bonuses, etc.) of $6.3 million per year.

The Shareholder Structure of Costco Wholesale Corp (NASDAQ:COST)



Technical Analysis of Costco Stock

Costco stock has been in an uptrend since the Covid-19 pandemic hit the United States in March of 2020. The current Costco stock trend is likely to continue as there are no signs of reversal at this time, and the current support line has been tested several times, with Costco stock price bouncing back up each time.


Costco stock has been making higher highs and higher lows for a couple of months now and Costco stock shows no signs of slowing up. The consensus on a short-term projection for Costco Wholesale (NASDAQ:COST) is that Costco stock is headed towards the $400 price level in the next couple of weeks.

Financial Analysis of Costco Wholesale Corp (NASDAQ:COST)

The following table shows the 3-year averages of the following metrics: total revenue, net income, operating cash flow, and free cash flow. Free cash flow is calculated by subtracting capital expenditures from cash flow from operations.


The following table shows the consolidated balance sheet for Costco Wholesale, comparing August 2020 to September 2019 in terms of assets, liabilities, and equity.

Cash and cash equivalents $12,277.00   $8,384.00
Short-term investments $1,028.00   $1,060.00
Receivables, net $1,550.00   $1,535.00
Merchandise inventories $12,242.00   $11,395.00
Other current assets $1,023.00   $1,111.00
Total current assets $28,120.00   $23,485.00
Property and equipment, net $21,807.00   $20,890.00
Operating lease right-of-use assets $2,788.00   $0.00
Other long-term assets $2,841.00   $1,025.00
TOTAL ASSETS $55,556.00   $45,400.00
Accounts payable $14,172.00   $11,679.00
Accrued salaries and benefits $3,605.00   $3,176.00
Accrued member rewards $1,393.00   $1,180.00
Deferred membership fees $1,851.00   $1,711.00
Current portion of long-term debt $95.00   $1,699.00
Other current liabilities $3,728.00   $3,792.00
Total current liabilities $24,844.00   $23,237.00
Long-term debt, excluding current portion $7,514.00   $5,124.00
Long-term operating lease liabilities $2,558.00   $0.00
Other long-term liabilities $1,935.00   $1,455.00
TOTAL LIABILITIES $36,851.00   $29,816.00
Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding $0.00   $0.00
Common stock $0.01 par value; 900,000,000 shares authorized; 441,255,000 and 439,625,000 shares issued and outstanding $4.00   $4.00
Additional paid-in capital $6,698.00   $6,417.00
Accumulated other comprehensive loss -$1,297.00   -$1,436.00
Retained earnings $12,879.00   $10,258.00
Total Costco stockholders’ equity $18,284.00   $15,243.00
Noncontrolling interests $421.00   $341.00
Total equity $18,705.00   $15,584.00
TOTAL LIABILITIES AND EQUITY $55,556.00   $45,400.00


Quantitative Analysis of Costco Stock

Liquidity Ratios

Working Capital: $3,28 billion
Sales to Working Capital Ratio: 50.9
Debt to Equity Ratio: 0.66
Quick Ratio: 0.6
Interest Coverage Ratio: 33.54
Current Ratio: 1.13
Cash Ratio: 0.49
Operating Cash Flows to debt: 1.179

Profitability Ratios

Gross margin: 13.09%
Operating Margin: 3.26%
Net Margin: 2.40%
Return on Assets: 7.20%
Return on Equity: 22.87%
Return on Invested Capital: 7.47%

Valuation Ratios

Price-to-Book Value Ratio: 9.08
Dividend Yield: 0.75%
Earnings Yield: 2.51%
Price-Earnings Ratio: 39.91
Operating Cash Flows Per Share: 20.08
Book Value Per Share: 39.66
Price-Sales Ratio: 0.95
% Earnings Retained: 63.04%

Discounted Cash Flow (DCF) Analysis for Costco Stock

For the DCF analysis below, we used the following: an intermediate growth rate of 8%, a long-term growth rate of 3.5%, and a discount rate of 7.27%.


Based on the DCF valuation model employed here for Costco Wholesale Corp. (NASDAQ:COST), Costco stock is currently undervalued by 5.93%. It is important to note that investment decisions should never be based solely on any single type of analysis, and especially just based on a single valuation analysis. Doing as much research as possible and consulting with investment professionals is always highly recommended when considering the purchase of a stock. Further, the DCF is not always the best method to calculate the intrinsic value of a stock.

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