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Costco Wholesale (COST) recently came out with a product that appeals to survivalists and teenagers -- a 27-pound tub of macaroni and cheese that it says will last 20 years. It seems outlandish, but fans are apparently feasting on the product: it's currently out of stock on the Costco website.
It's part of what makes Costco a unique company, with a voracious fan base that keeps coming back for more. The company's renewal rate is over 90%, rising slightly over the past year even after the company raised its membership fee in the middle of 2017. Income from the fee accounts for just over 2% of Costco's revenue, but it's growing at a strong clip, up 9.5% year over year in the first quarter.
And yet the stock has been in a mini-slump since September, falling 14% from its 52-week high of $245.16 to a recent $209.60 . Shares trade at 26 times the company's expected earnings, about in line with historical trends. Bullish analysts like Cowen's Oliver Chen see the stock rising near its prior high, returning more than 15% including a small dividend payout.
Costco seems particularly well-positioned to gain in the current economy -- its business is almost entirely domestic, insulating it from recent economic troubles in China and Europe . Costco has consistently proven resilient in the face of competition from Amazon (AMZN). And it should be able to weather recent doubts about the U.S. economy. Consumer spending remains very strong.
That strength is evident in Costco results. Sales at stores open at least a year jumped 6.1% in December, ahead of Wall Street's expectations for 4.8% growth. Costco's website has never been much of a sales-driver, but the company has improved it, helping spark 23.9% e-commerce sales growth in the month after adjusted for currency and accounting changes.
The stock fell 8.6% on Dec. 14 , its worst drop in a decade, on disappointing sales numbers. The company said it was facing more competition in food sales, but it doesn't appear that it had to cut prices too drastically -- margins in its core business (excluding gas) were down just 0.06 percentage points, a shift of 6 cents for every $100 . "It's bupkis," Costco CFO Richard Galanti tells Barron's. Because of Costco's size, "every basis point [of margin] on an annual basis is $13 million ," Galanti notes, causing investors to sometimes react dramatically to relatively small shifts.
Concerning any price cuts, Galanti explains, "Overall, we haven't seen a lot of inflation or deflation."
"We feel good about our business," adds Galanti, citing benefits like its credit card relationship with Citigroup (C) that, he says, has much better economics than its former deal with American Express (AXP). Costco has also benefited from the Trump tax cuts, plowing those savings back into lower prices for consumers and better compensation for employees. "We think that's why you've seen strength in our numbers."
Costco stock also dropped in October after the company disclosed a "material weakness in an internal control" that consisted of some employees having access to computer systems that they shouldn't have. Galanti says the company believes the issue did not impact customers or the company's financial statements. His bonus was reduced by $20,000 due to the issue and CEO Craig Jelinek voluntarily declined to take his bonus.
Tariffs have also hit some products Costco sells, but the company has so far seen little bottom-line impact. It imported some goods in advance and has worked with suppliers to blunt the impact, in part by importing from factories outside of China , Galanti says. Price hikes aren't out of the question should tariffs jump, but the company will focus on protecting Costco members.
"Whatever the price increase has to be, we like to think that we're going to have the smallest price increase and be the last to do it," Galanti says. "It's part of our culture."
So never fear, Costco fans. Even if the 27-pound tub of mac n' cheese is gone temporarily, there's always the 6.6- pound bucket of Nutella for $22 . And a pretty attractive stock.
