Author Topic: COST - Costco  (Read 34056 times)

SlowAppreciation

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COST - Costco
« on: June 20, 2018, 05:53:20 AM »
Surprised there's no thread already. Maybe because it's a retailer trading for 27x earnings?

  • 2nd largest retailer in the world
  • ~750 warehouse-style stores (opening 25 new ones per year). Only "members" can shop there
  • 50m very loyal members (88% retention rate), and adding ~2.5m new ones per year
  • Makes most of their money off membership fees rather than merchandise sales. Almost all merchandise margin is reinvested into lower prices and better products
  • First class operator (highest sales per store/employee in industry, negative working capital, high inventory turns)
  • $135b sales / $2.7b profit / $4b FCF (all growing ~8% year)
  • 13% GM, 3% OM, 2% NM
  • 25% ROE, 15% ROC (and increasing since total capital has been flat while profits have increased)
  • Great management team (and Munger on board)
  • E-Commerce growth is accelerating—35%+ year (though off a small base and only makes up 3.7% of total sales)
  • Has largely been unaffected by Amazon
  • Lots of opportunities for continued growth (e-commerce, international/China, Kirkland private brand)
  • Surprisingly little ownership from top investors. Aside from BRK's small stake, and Munger's personal stake, only Gayner and Russo hold any shares. But these positions are <0.2% of their total portfolio.

If anyone is interested in more detail, I put together a deck.
« Last Edit: June 20, 2018, 06:14:09 AM by SlowAppreciation »


EricSchleien

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Re: COST - Costco
« Reply #1 on: June 20, 2018, 05:55:51 AM »
The link to your deck doesn't work.
My book: https://amzn.to/2JFdVfz


EricScheien.com
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SlowAppreciation

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Re: COST - Costco
« Reply #2 on: June 20, 2018, 06:14:28 AM »
The link to your deck doesn't work.

Whoops, sorry about that.

longinvestor

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Re: COST - Costco
« Reply #3 on: June 20, 2018, 07:19:06 AM »
Surprised there's no thread already. Maybe because it's a retailer trading for 27x earnings?

  • 2nd largest retailer in the world
  • ~750 warehouse-style stores (opening 25 new ones per year). Only "members" can shop there
  • 50m very loyal members (88% retention rate), and adding ~2.5m new ones per year
  • Makes most of their money off membership fees rather than merchandise sales. Almost all merchandise margin is reinvested into lower prices and better products
  • First class operator (highest sales per store/employee in industry, negative working capital, high inventory turns)
  • $135b sales / $2.7b profit / $4b FCF (all growing ~8% year)
  • 13% GM, 3% OM, 2% NM
  • 25% ROE, 15% ROC (and increasing since total capital has been flat while profits have increased)
  • Great management team (and Munger on board)
  • E-Commerce growth is accelerating—35%+ year (though off a small base and only makes up 3.7% of total sales)
  • Has largely been unaffected by Amazon
  • Lots of opportunities for continued growth (e-commerce, international/China, Kirkland private brand)
  • Surprisingly little ownership from top investors. Aside from BRK's small stake, and Munger's personal stake, only Gayner and Russo hold any shares. But these positions are <0.2% of their total portfolio.

If anyone is interested in more detail, I put together a deck.

Thanks for posting. Nice deck too (minimalist slides are a hit with me).

Question? Instead of WMT, Sam's club would be an apples-to-apples comparison. I'm sure WMT does not break out Sam's Club numbers, so that would make it difficult. I'm aware that brand loyalty is far, far better at Costco, so are product brands, they are clearly premium relative to Sam's. Judging by the company I keep at Sam's versus my friends who shop at Costco, the demography is clearly lower socio-economical strata relative to Costco.

But Sam's club is a big hit with small business, they open the store to them earlier than consumers. The Member's mark brand is also dirt cheap. I'm a cheap shopper:-) P&G for ex. is bearing the brunt of this, judging by my own shopping behavior. Tide and Gillette for example are clearly rattled as I am seeing, they are throwing in massive discounts; There is one for $25 off of $100 purchase today. Member's mark still beats that discounted price. It's not fun to be a brand for boxed goods. One subtle yet significant change I see both at Walmart and Sam's is the display label size and actually the larger font size of the unit price (your slide # 62 on Heinz Ketchup price per OZ). As a price conscious shopper, my eyes go toward that number first and I don't have to squint or get really close to read it ;)  Plus I don't stand in line for check out anymore at Sam's with their Scan and Go app. WMT is clearly going to squeeze Amazon on margins even more.

And then there is Aldi! I am not a regular there, but am starting to observe their strategy as I am able to. They are yet another reason to challenge the naive assumption that Amazon dominates retail from here to judgment day. Your concluding slide is spot on!

 
« Last Edit: June 20, 2018, 07:20:41 AM by longinvestor »

SlowAppreciation

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Re: COST - Costco
« Reply #4 on: June 20, 2018, 07:43:46 AM »
Surprised there's no thread already. Maybe because it's a retailer trading for 27x earnings?

  • 2nd largest retailer in the world
  • ~750 warehouse-style stores (opening 25 new ones per year). Only "members" can shop there
  • 50m very loyal members (88% retention rate), and adding ~2.5m new ones per year
  • Makes most of their money off membership fees rather than merchandise sales. Almost all merchandise margin is reinvested into lower prices and better products
  • First class operator (highest sales per store/employee in industry, negative working capital, high inventory turns)
  • $135b sales / $2.7b profit / $4b FCF (all growing ~8% year)
  • 13% GM, 3% OM, 2% NM
  • 25% ROE, 15% ROC (and increasing since total capital has been flat while profits have increased)
  • Great management team (and Munger on board)
  • E-Commerce growth is accelerating—35%+ year (though off a small base and only makes up 3.7% of total sales)
  • Has largely been unaffected by Amazon
  • Lots of opportunities for continued growth (e-commerce, international/China, Kirkland private brand)
  • Surprisingly little ownership from top investors. Aside from BRK's small stake, and Munger's personal stake, only Gayner and Russo hold any shares. But these positions are <0.2% of their total portfolio.

If anyone is interested in more detail, I put together a deck.

Thanks for posting. Nice deck too (minimalist slides are a hit with me).

Question? Instead of WMT, Sam's club would be an apples-to-apples comparison. I'm sure WMT does not break out Sam's Club numbers, so that would make it difficult. I'm aware that brand loyalty is far, far better at Costco, so are product brands, they are clearly premium relative to Sam's. Judging by the company I keep at Sam's versus my friends who shop at Costco, the demography is clearly lower socio-economical strata relative to Costco.

But Sam's club is a big hit with small business, they open the store to them earlier than consumers. The Member's mark brand is also dirt cheap. I'm a cheap shopper:-) P&G for ex. is bearing the brunt of this, judging by my own shopping behavior. Tide and Gillette for example are clearly rattled as I am seeing, they are throwing in massive discounts; There is one for $25 off of $100 purchase today. Member's mark still beats that discounted price. It's not fun to be a brand for boxed goods. One subtle yet significant change I see both at Walmart and Sam's is the display label size and actually the larger font size of the unit price (your slide # 62 on Heinz Ketchup price per OZ). As a price conscious shopper, my eyes go toward that number first and I don't have to squint or get really close to read it ;)  Plus I don't stand in line for check out anymore at Sam's with their Scan and Go app. WMT is clearly going to squeeze Amazon on margins even more.

And then there is Aldi! I am not a regular there, but am starting to observe their strategy as I am able to. They are yet another reason to challenge the naive assumption that Amazon dominates retail from here to judgment day. Your concluding slide is spot on!

Sam's Club is definitely a closer comp versus WMT, but hard to get all the data on it. However it's pretty clear that Costco simply out-executes Sam's Club, which results in lower prices, more affluent customers, and better growth prospects

Your points about small biz and Sam's Club are the same for Costco (20% of their members are small biz owners).

Sam's Club is also closing ~60 stores, 50 of which are <25min drive to the nearest Costco.

I'm not too familiar with the Sam's Club store brand, but Costco's Kirkland is incredibly valuable, and it now makes up 25% of the company's total sales. And it's a product you can't find anywhere except Costco. So I agree that the CPG guys must be nervous.

Aldi is interesting as they seem to have a similar model to Costco, though without the massive bulk sizes and quality brands. Seems like a well run company, but I read an article the other day about their scaling back of US expansion this year. Can't find the article now, but I believe the original plan was for 60 new stores and now they're doing 30.

longinvestor

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Re: COST - Costco
« Reply #5 on: June 20, 2018, 08:01:43 AM »
My point is that Costco+Sam’s+Aldi+XYZ+ABC versus AMZN. Online, ship-to-home etc are no longer differentiators for Amazon. As you point out, Costco is playing with that before scaling up. So is WMT.

Around Chicagoland, there are some entrenched, small, local grocery chains that are next to impossible to compete against. Heck, they beat the crap out of even WMT in their niches.

No, retail and grocery are alive and kicking.

Viking

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Re: COST - Costco
« Reply #6 on: June 20, 2018, 10:37:36 AM »
SlowAppreciation, great summary.  I used to call on Costco 20 years ago (for a large multinational). I came to understand and appreciate their business model. Very tough customer to deal with, but very predictable (they were very transparent with what they wanted from a manufacturer). Never owned the stock even I admired their business model... great example of too much thumb sucking on my part.

Here are some thoughts:
- the 20 foot check: regarding marketing, Costco explains to suppliers that if your pallet has great graphics/appeal your sales will increase by +20%. So manufacturers are motivated to have the right container, the right tray with graphics and the right pallet configuaration with total graphics. Costco says from 20 feet away a customer should see your pallet and be drawn to it. This creates a lot of competition among manufacturers to have the best pallet look. And it works.
- Darwinian listing model gets manufacturers aggressively competing with each other: Costco is open to listing new items as long as it will sell at a higher level than existing items; this creates an incredible amount of competition for like items (i.e. there are lots of cheese manufacturers competing for the same listing). And they are not constrained by category. As a result, manufacturers are constantly coming up with new ideas for products. Lower selling items are constantly being challenged by new potentially higher selling items. Costco tells the manufacturers of lower selling items they need to do better or lose the listings. Bottom line is Costco has a steady stream of new products fighting for listing space. This model is constantly morphing...
- Kirkland Signature: for many years, Costco was national brand focussed. However, they always said if the value gap got too large they would look to launch Kirkland Signature in that category. It will be interesting to see where they take Kirkland Signature in the coming years; perhaps it will join the national brands in terms of recognition with consumers (not sure). Launching Kirkland Signature is the nuclear option for Costco in a category. They are yelling at the national brand that their value proposition no longer works.
- treasure hunt aspect is unique: Costco does an amazing job of bringing in quirky items/seasonal items. This motivates shoppers to come into the store more frequently (to see what is new). This also motivates purchases (the item might not still be there when you go back the next time).
- return policy is best in class: crazy what they take back. Cost is picked up by manufacturer as cost of doing business with Costco
- real estate angle. My understanding is when they purchase real estate for a new location they also buy adjacent land is it all goes up in price once Costco announces they will be building.
« Last Edit: June 20, 2018, 10:55:09 AM by Viking »

bizaro86

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Re: COST - Costco
« Reply #7 on: June 20, 2018, 10:56:04 AM »
I thought there was a thread already, I thought I remembered discussion on COST last spring/summer. I bought some then at $160 on Amazon fears. I have it in my "keep this quality business forever" mental bucket.

Great deck, one thing I would add is the advantage of only selling one brand of everything. You mentioned them being a big buyer because of that, but that isn't the full extent of the leverage it gives them.

Vendors know they only sell one brand. If you're P&G, you know you're one discount away from getting replaced by Kimberly Clark. And you won't lose 20% of the volume, you'll lose 100% of the volume.

bookie71

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Re: COST - Costco
« Reply #8 on: June 20, 2018, 05:21:59 PM »
Munger is on the board.
When I first started following Costco they were 6th in rank.  How much farther can they go?
They closed all of the Sam's clubs in Alaska and Costco is opening it's 4th warehouse in Alaska.
As one of my best friends said, "Going to Sam's is like going to amatur hour"
Always remember, Pigs get fat and hogs get slaughtered.

chrispy

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Re: COST - Costco
« Reply #9 on: June 20, 2018, 06:20:55 PM »
Great deck. I never quite understood all they did and how well they do it. Thank you guys for sharing your insights