As we well know Amazon (NASDAQ:AMZN) has aggressively pursued the physical retail world. From the ordering feature on its mobile app to its physical storefronts, the e-commerce leader has been doing everything to get customers to buy its products online. And one of America’s biggest retailer – Costco Wholesale – is seen by many as a possible target of Amazon. Costco Wholesale, Inc.(NASDAQ:COST) is one of the largest wholesale club operators in North America; the company operates in the United States and Canada. With over 50 million members, Costco has the potential to become a top retail destination for many low-cost goods.
With a promise of price savings, the company is an attractive prospect for many consumers on a budget. However, investors should note the company’s high costs and growth potential.
Costco Wholesale has constantly evolved throughout its history to stand out from its competitors and stay relevant to changing consumer needs. These changes required the company to reassess its business model and operations continually. As a result, the company has adjusted its pricing, distribution, and other operating practices over the years to remain profitable and grow its loyal member base. These strategies helped the company become one of the biggest warehouse clubs globally.
Investors continue to flock to the warehouse club leader because of its unique business model. Simple, affordable prices and good performance are the characteristics of this product. However, according to research, a significant online presence is unnecessary for retail success. It has an online sales volume of only 7% compared to Amazon.
At the time of writing, Costco Wholesale (COST) stock had risen 4% in April to a new closing high of $600. Last year, the stock gained 66%. On the other hand, Amazon.com (AMZN) stock was down 6.4% last year.
Costco stock now trades at 46 forecasted earnings for the next year of $13 per stock and 42 times forecast earnings for the following year, ending in August 2023, respectively.
Amazon has long had the highest P/E among large retailers despite being both a retailer and a technology company, thanks to its dominant online retail franchise and core cloud computing businesses. However, due to the great value of Amazon Web Services, the company’s cloud business, Amazon’s retail P/E may be less than 43.
In other words, Costco’s estimated 2023 earnings (Ebitda) put it ahead of Amazon in terms of net worth. Amazon sells for almost 16 times the estimated 2023 Ebitda of this company. Compared to Amazon, Costco’s market capitalization is just $270 billion.
In March, Costco saw a 10% increase in comparable sales after controlling for several variables, including the high fuel cost. EPS is forecast to increase by 18% this fiscal year and 10% next year. FactSet numbers show annual earnings are up 16% over the previous five years. High P/E values expose Costco to any setbacks.
Costco continues to attract customers to its warehouse clubs because of its low prices and treasure-hunting environment. In addition, due to high inflation, it is becoming more attractive to consumers. Costco’s primary source of revenue is its $60 annual membership fee. As a result, the company has a subscription strategy with a high renewal rate of over 90%.
Price increases of more than 15% are typically not allowed by Costco. That makes Costco’s bargain offering almost unsurpassed. Moreover, despite paying staff better than most of its competitors, including Walmart, Costco can make money on low margins because it keeps spending (WMT) low.
The company’s membership grew to 61.7 million members, an increase of 7% during the most recent fiscal year. The majority of the company’s 829 warehouses are
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