![]() In the case of Kirkland products, Costco is the only customer and stays very close to the vendors allowing them to drive pricing and quality. They drive exceptional pricing from vendors through purchasing high volumes of limited (but very carefully chosen) products. They pay market-leading wages and provide superior benefits, so they enjoy low employee turnover and reap the efficiency benefits of motivated, happy employees. But the $4.7B in membership fees drops straight to the EBIT line, so that the model nets an operating margin of ~3.5%, or $8.1B on $242B in sales in FY23.Ĭompared to other retailers, Costco has low overhead due to the no-frills warehouses which act as both warehouse and retail floors, along with limited business hours and hence lower employee hours. The business model is designed to make very little profit on the actual merchandise itself (~10.5% gross merchandise margins, ~1.5% operating margins before membership fees). Their private-label Kirkland Signature brand (20+% of non-gas sales) offers even better values, and has become a franchise in its own right. Management states that they practice " pricing authority" vs competitors. For one, Costco has perfected the art of curating a limited selection of name-brand goods which their members find attractive, and offering them at the lowest prices found anywhere. This is not just another Sam's or BJ's (though management cites Sam's as their toughest competitor). It builds large no-frills warehouses, stocks them with limited SKUs in large quantities that it sells for rock-bottom prices, and charges a membership fee to access the warehouses and a suite of additional services. There are several good articles by other Seeking Alpha authors for that, and I think most folks are familiar with Costco's general business model. ![]() This article is not meant to be a deep-dive analysis of Costco's business. And oh yes - I don't own a single share but would really like to based on the business quality. The other reason I chose Costco is it was arguably Charlie Munger's favorite company, and with his recent passing it seemed a nice tribute to someone I have learned a great deal from. So my plan here is to provide a framework to help decide what price is worth paying. Spoiler alert: I cannot justify buying the stock anywhere near current prices. Given this, how can a value investor add Costco stock to their portfolio? Strictly from a wonderful business perspective it could be considered a core "forever" holding, but as we know, overpaying for even a great company can lead to mediocre returns. The stock is up something like 14% this month, >48% this year, and ~240% over the last 5 years, while currently trading north of 40x earnings. Costco recently reported decent quarterly results and the stock has headed further into the stratosphere. ![]() Nearly everyone also agrees it's a fantastic business, which justifies a lofty valuation. My first article on Seeking Alpha after a 13-year hiatus will focus on Costco Wholesale Corporation ( NASDAQ: COST), a company nearly everyone agrees is currently overvalued. Art Wager Costco Is Not Flying Under Anyone's Radar - Where To Buy The Stock?
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