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Costco Wholesale Corp COST

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Morningstar’s Analysis

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Economic Moat




Strong End to Fiscal 2020 Showcases Costco’s Strength Amid Pandemic, but Shares Seem Rich

Zain Akbari, CFA Equity Analyst

Analyst Note

| Zain Akbari, CFA |

Our $286 per share valuation of wide-moat Costco should rise by a mid-single-digit percentage after it reported strong fourth-quarter earnings, as the pandemic led sales higher with better-than-expected margins as the firm benefited from cost leverage and a relatively promotion-light competitive environment. We still believe the pandemic’s near-term effects are largely separate from Costco’s long-term prospects and continue to call for mid-single-digit top-line growth and 3% operating margins over the next decade. We suggest investors await a more attractive entry point despite our favorable view of the firm and its competitive advantages.

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Company Profile

Business Description

The leading warehouse club, Costco has 782 stores worldwide (at the end of fiscal 2019), with most of its sales derived in the United States (73%) and Canada (14%) and a large presence in Mexico, the United Kingdom, and Japan. It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 40% of fiscal 2019 sales, with ancillary businesses (such as fuel and pharmacy) 19%, hardlines just over 16%, fresh food 13%, and softlines 11%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 4% of Costco’s global sales come from the e-commerce channel.

999 Lake Drive
Issaquah, WA, 98027
T +1 425 313-8100
Sector Consumer Defensive
Industry Discount Stores
Most Recent Earnings May 31, 2020
Fiscal Year End Sep 1, 2020
Stock Type Classic Growth
Employees 254,000