6 Reasons Why Costco Is Dominating A Difficult Retail Market

On Wednesday, Costco Wholesale Corporation COST reported 5.4% same-store sales growth and 15.7% online sales growth in the month of June.

Quarter after quarter, Costco continues to put up strong numbers, and its investors get rewarded. Analysts say Costco’s long-term success is no coincidence, and the company’s unique approach to a difficult retail market should continue to prove lucrative for investors.

Costco’s Recipe For Success

In the past five years, the SPDR S&P Retail XRT is down 1.7% overall as Amazon.com, Inc. AMZN and other online retailers have pressured the traditional retail sector. In that same stretch, the SPDR S&P 500 ETF Trust SPY is up just 52.1%, while Cosco shares are up an incredible 132.7%.

The Hustle recently outlined six reasons why Costco is defying the odds and thriving in the retail market. 

• The average Costco product price markup is just 11% compared to the 25%-50% markup often seen in other retail stores.
• Costco customers pay either a $60 or $120 annual membership fee regardless of how much they shop.
• Costco focuses on bulk quantity rather than more choices, offering only about 10% of the SKUs at a typical supermarket.
• Costco works closely with vendors to reduce prices and improve product quality.
• Costco makes employees happy, paying an average wage of $21 per hour, nearly double the pay of the average Walmart Inc WMT employee.
• Costco focuses on customer satisfaction rather than shareholder satisfaction, pushing back on investor calls for larger markups, higher membership fees and fewer employee benefits.

Differentiated Retail Play

As a result of these six factors, Costco has differentiated itself among grocery chains. On Wednesday, Baird analyst Peter Benedict raised his Costco price target by $20 and said the stock is a rare growth story among large-cap staple stocks.

“While some continue to search for signs that COST's model is losing relevance, we believe the company's expanding structural cost advantages, ‘noble’ approach to passing savings along to members and growing omni-channel capabilities are actually improving its traction with consumers,” Benedict said in a note. 

Baird has an Outperform rating and $290 price target for Costco.

Related Links:

What To Make Of Costco's May Sales

These Analysts Say The Bullish Case For Costco Remains Unchanged