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Costco Wholesale Corp COST

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Morningstar’s Analysis

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Another Strong Quarter for Costco as the Coronavirus Sales Surge Continues; Shares Seem Rich

Zain Akbari, CFA Equity Analyst

Analyst Note

| Zain Akbari, CFA |

We plan a mid-single-digit percentage increase for our $310 per share valuation of wide-moat Costco after its first-quarter results beat our expectations and as rising infection rates should lead second-quarter sales above our prior target. We still believe the pandemic-spurred sales surge does not reflect Costco’s long-term potential, and continue to call for mid-single-digit percentage top-line growth and low-single-digit operating margins over the next decade. While we have a favorable view of Costco’s competitive strengths (underpinned by its brand and vendor relationships as well as a scale-based cost advantage), we suggest investors await a more attractive entry point.

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Company Profile

Business Description

The leading warehouse club, Costco has 795 stores worldwide (at the end of fiscal 2020), with most sales derived in the United States (73%) and Canada (13%). 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 42% of fiscal 2020 sales, with hardlines 17%, ancillary businesses (such as fuel and pharmacy) nearly 17%, fresh food 14%, and softlines 10%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 6% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).

999 Lake Drive
Issaquah, WA, 98027
T +1 425 313-8100
Sector Consumer Defensive
Industry Discount Stores
Most Recent Earnings Nov 30, 2020
Fiscal Year End Aug 30, 2021
Stock Type Classic Growth
Employees 273,000