The market crash has taken the stock to bear market, much to the panic of many investors as powerful companies have seen their share tanks. This is a market that seems to have no safe haven because the vague color of inflation casts a dark shadow over the entire market, but the epidemic stocks, technology companies and the entire retail sector.
Costco (Cost) – Get Costco Wholesale Corporation Report Has not been immune to drops. The Warehouse Club operates as usual, despite retaining existing members and adding members continuously, the chain has seen its share price fall 22.83% in the last six months.
This is a big drop for a chain that was a very stable stock, usually moving upwards when paying dividends. The decline in Costco’s share price has nothing to do with the company’s performance. Instead, the company has been the subject of widespread concern about retail in general.
Target (TGT) – Get Target Corporation ReportIts shares, for example, have lost more than 25% of their value since the first quarter’s results were reported. The chain has increased its same-store sales, which was impressive as it grew by 22.9% in the previous quarter. Retailers are struggling to make a profit as rising costs and supply chain problems reduce revenue in the first half of the year.
Don’t assume that Wall Street has taken the strength of the target for weakness (making money and gaining customers under these conditions is impressive), Costco shareholders have little to worry about.
Why is Costco so powerful?
Retail stocks, including Target and Costco, have been hit by rising prices (inflation), supply chain problems and fears of falling consumer spending. These are real concerns, but Costco has a lot of protection from these problems Warehouse Club works a membership model. Its profit comes primarily from the sale of membership, not on the products it sells to its members.
Costco promises members a lower price in exchange for a membership fee. The company offers a limited selection to keep prices low and has the ability to bargain a lot with suppliers.
It is possible that inflation will push up the prices of some key Costco items, but they can easily pass this increase without the company adding a markup. This makes the chain a value proposition for buyers as these factors affect all retailers.
Costco has been able to hold its own at the gross margin, according to CFO Richard Galanti, speaking during the company’s second-quarter earnings call.
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“The decline in the gross margin line. The gross margin we reported in the second quarter was 32 basis points lower than the year before, but excluded 5 basis points, excluding gas inflation,” he said.
Basically, with the exception of gas – which is usually cheaper in Costco than anywhere else – the company has maintained its margins. The same-store sales excluding gas increased 11.1% while its revenue also increased.
“Net income for the quarter was $ 1.299 billion or $ 2.92 per mixed share. Last year’s second quarter net income was $ 951 million or $ 2.14 per mixed share,” Galanti shared.
Membership is Costco’s core metric
Unlike a traditional retailer, sales are not the key metric for targeting. Membership tells investors more about the health of the company than anything else. Warehouse club members need both retention and new additions.
That’s what Galanti did.
“In terms of renewal rates, they continue to grow. At the end of the second quarter, our renewal rates in the United States and Canada stood at 92%, up 0.4 percentage points from the end of Q1 12-week ago. Where it stood at the end of Q1 12 weeks ago, “the CFO shared.
Costco’s renewal rates have seen more members increase as a result of automatic renewals. The Warehouse Club further observed that the majority of its members opted for high-value executive membership, “who renewed at a higher rate than the average, non-executive members,” shared the guarantee.
According to the CFO, the number of members is also increasing (as it is).
In terms of the number of members at the end of the second quarter, member families and total cardholders, the total households were 63.4 million, up from 62.5 million 900,000 12 weeks ago; And total cardholders at the end of Q2, 114.8 million, up 1.7 million from 113.1 million 12 weeks ago. At the end of the second quarter, paid executive membership stood at 27.1 million, an increase of $ 644,000 over the 12-week period ending Q1. Executive members, however, now represent 42.7% of our total member base and 70.9% of our total sales.
Thus, while Costco’s share price suffered due to widespread concern and general market panic, the chain’s business did not suffer. In a frightening environment for investors, you could argue that Costco is a safe bet unless you are willing to be patient.
In the short term, stock prices may not reflect the actual business results. Over time, however, the warehouse club will return to posting fixed share profits while paying a dividend (and possibly offering a bonus special dividend).