Costco vs. Amazon: Race for the top position
Costco Wholesale is contesting Amazon's position as the top-rated retail giant. The wholesale chain continues to win investors over with its distinctive strategy. Costco uses a simple concept with a limited product line at low prices and good service. The company has proven that a retailer does not need a large internet presence to be successful. With an online share of only seven percent, it is the “anti-Amazon”.
Costco stock has been on a run lately, rising 4 percent to $600 in April after hitting a record high on Thursday's close. The stock is up around 66 percent over the past 12 months. In comparison, Amazon shares have lost 6.4 percent over the past year.
Costco shares now trade at 46 times forward earnings of $13 per share for the company's fiscal year ended August. For the following fiscal year, which ends in August 2023, they trade at 42 times estimated earnings.
That's the highest price-to-earnings multiple of any major brick-and-mortar retailer, just below Amazon's 43 times earnings for 2023.
Amazon, with its dominant online commerce and leading cloud computing business, has long had the highest P/E among major retailers. In fact, it's part retailer and part technology company. Amazon's retail P/E is arguably below 43 due to the high valuation of its cloud division, Amazon Web Services.
Based on its 2023 projected EBITDA (earnings before interest, taxes, depreciation of property, plant and equipment, and amortization of intangible assets), Costco is even more valuable than Amazon. It trades at 22 times expected 2023 EBITDA, compared to just 16 times Amazon. However, Costco's market value is only $270 billion -- a fraction of Amazon's $1.6 trillion.
Costco continues to perform well, with comparable sales up about 10 percent in March, after adjusting for various factors including high gasoline prices. Earnings per share are expected to grow 18 percent this fiscal year and 10 percent next year. According to FactSet, profits have grown 16 percent annually over the past five years. Because of its high P/E ratio, Costco is vulnerable to misses.
Costco continues to lure shoppers into its warehouse clubs with its rock-bottom prices and bargain-hunting vibe. High inflation makes Costco even more attractive to consumers. The company derives the majority of its profits from membership fees - the base fee is $60 per year. The company thus offers a kind of subscription model, with around 90 percent of subscriptions being renewed regularly.
As a rule, Costco does not increase the prices of the goods by more than 15 percent. As such, Costco's value for money is almost unbeatable. Costco can actually make money with such low price hikes because it keeps its expenses low -- even though it pays its employees better than most of its competitors, including Walmart.
The number of members continues to grow and has risen by seven percent to 61.7 million in the current financial year. The company operates 829 stores, mostly in the United States.
Another secret to Costco's success is its fight against shoplifting, which is a growing problem in the industry. The company has kept losses from theft at one of the lowest levels in the retail industry. Costco's loss rate is 0.1 to 0.15 percent annually, while many retailers are in the over 3 percent range.
The low loss rate can be attributed to several factors. For example, there is usually only one entrance to a Costco store, and employees check the till receipts. The goods are also often bulky and therefore difficult to steal. In addition, the customers are “members”. This self-selection by the customers usually screens out the thieves.
After Costco reported strong revenue gains in March, UBS analyst Michael Lasser wrote last week that the company is “taking the right steps to continue to thrive in a post-coronavirus world. In addition, increased pressure on consumers could lead to further increases in membership and retail spending. We believe the company's stock does not fully reflect these positive developments.” He rates the stock as Buy with a price target of $625.
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