Cost Conscious Costco

Cost Conscious Costco

Costco has cultivated a devoted customer base in the US by appealing to price-sensitive consumers, addressing recession concerns, and focusing on selling products at lower margins than competitors. As of Friday, the retailer’s price-to-earnings (P/E) ratio was just under 60, compared to Walmart (41) and Target (16). 

Over the last five years, Costco’s share price has risen by just over 200%. Examining the company’s financials, Costco reported revenue of $149 billion and a net income of $3.7 billion in 2019, resulting in a net margin of 2.5%. By 2024, the revenue grew to $253 billion, with a net income of $7.4 billion, reflecting a 2.9% margin.  

In its most recent quarter, Costco achieved a gross margin of 11%. For comparison, Walmart’s latest quarter showed a net margin of 2.7% on revenue of $169 billion, with a gross margin of 25%. 

Costco has managed to keep product prices low while maintaining respectable net margins through several strategies:

  • Membership model: Customers must have a Costco membership to shop, encouraging repeated purchases, and allowing Costco to collect personalised client purchasing data. 
  • Bulk purchasing and limited selection: This approach allows Costco to negotiate lower prices and streamline inventory management, reducing costs further. 
  • No-frills operations: By minimizing operational expenses, Costco maintains its ability to sustain a relatively healthy margin. 

Given the high P/E ratio, Costco must adhere strictly to its reputation as an “extremely well-run, no-frills business.” Notably, the company’s membership fees are nearly equivalent to its net income, indicating that membership growth is important for overall expansion. Any significant misstep by Costco could lead to a substantial decrease in its stock price.  

Shares held
Lunar Capital key indicators

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Disclosures
Lunar Capital (Pty) Ltd is a registered Financial Services Provider. FSP (46567)
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet  can be read here.
This stocktake is prepared for the clients of Lunar Capital (Pty) Ltd. This stocktake does not constitute financial advice and is generated for information purposes only.

Share article

Latest Posts

Nike: Will they Do It?
Nike: Will they Do It?
Does Nike have what it takes to implement their turnaround vision?
Good prices and good margin, How has Costco managed it?
Cost Conscious Costco
Good prices and good margin, How has Costco managed it?
Stocktake Image _ 2024-09-13
Zara Fit Check
What is Inditex doing to position itself for the future

Lunar Capital
on Eastwave Radio

Every Wednesday, at 07h45, Sabir chats with Nazia from Eastwave Radio (92.2 fm, live stream on
www.eastwave.co.za) on investing and the markets.

eastwave-radio
Scroll to Top