- Branson’s Virgin Galactic takes another step toward space tourism
- Trump’s economy ‘a little under’ 3 percent growth goal: Fed
- As tensions over aid rise, Venezuelan troops fire on villagers, kill two
- Virgin Galactic astronauts describe 'surreal' spaceflight: 'The views are absolutely extraordinary'
- Elementary school teacher captures two students slow dancing on Valentine's Day
Costco (NASDAQ: COST) has been a bright light in a somewhat bleak retail environment. While many chains are closing locations (including chief rival Sam’s Club) and some are going out of business, the warehouse club has thrived.
Continue Reading Below
The retailer has continued its slow, steady expansion while growing its user base. It has also, at least recently, done a good job at moving itself into the internet era by improving its website and adding multiple delivery options, including a same-day delivery partnership with Instacart.
Despite that, Costco stock has been somewhat volatile. It tends to move negatively whenever a major rival makes a move, such as when Amazon (NASDAQ: AMZN) bought Whole Foods. Of course, eventually Costco’s share price corrects itself, but people seem to be selling for short-term reasons. Here are three shortsighted reasons some investors might be selling Costco.
1. Fear of Amazon
Amazon has moved into brick-and-mortar retail with Whole Foods, and it may buy another chain in 2018. That’s probably bad for grocery chains, but it has no impact on Costco.
The warehouse chain makes most of its money (about 75%) from memberships. It has maintained a 90% renewal rate despite a June 2016 price increase and has importantly grown its pricier executive membership base.
Continue Reading Below
Costco’s main goal isn’t to get customers to shop more. It’s to get them to renew their memberships. In many ways that works like a gym, where the prospect of saving keeps people on board even if they don’t use their membership that much.
Amazon offering good prices and having a brick-and-mortar presence won’t cause Costco customers to drop their memberships. So far, it has not even caused members to shop at the chain less, given that Q1 comparable-store sales rose by 10.5% and digital sales increased by 43.5%.
2. The retail apocalypse
Another worry that has caused some people to doubt Costco is that the retail apocalypse causing stores to close will make it less likely for consumers to leave their home. Yes, there may be openings at the mall and some barren strip malls.
That, however, has not impacted Costco stores, which are destinations in and of themselves. Consumers go there for value, but they also go there for the joy of discovering a bargain, and for the sampling, cheap food, and other in-store activities. That’s not likely to change because other retailers are struggling. In fact, having less brick-and-mortar competition could cause Costco members to visit more often.
3. Comparable-store sales
While Costco crushed it in Q1, the chain will inevitably have a quarter where comparable-store sales slow down. That may cause some analysts to predict doom and gloom about the chain’s ongoing prospects.
Comparable-store sales trends, however, are not always a sign of a company’s health, or at least not an important one. Dig deeper and look at the membership numbers. If renewal rates remain around 90% and membership counts continue to move higher, then it’s OK to overlook same-store sales.
Costco is not a traditional retailer
Remember that Costco is a club where members pay a fee in exchange for really good prices. That’s a different business model than most retailers use, and it has different metrics for success.
Many casual observers won’t understand what actually makes the company tick. That makes the company vulnerable to short-term negative moves, but ultimately those dips will likely correct as the market catches up on understanding the real numbers that drive the chain.
10 stocks we like better than Costco Wholesale
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Costco Wholesale wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 5, 2018
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.