Retail is a very competitive industry.
Per spglobal, 300 US retailers have gone bankrupt over the last 10 years — avg 2.5 retailers a month.
Some of the prominent ones include Sears, JCPenny, Bed Bath & Beyond.
Many other retailers are reducing their store footprint significantly and trying to stay afloat.
But there is a mass retailer — Costco — that continues to thrive and is expanding globally.
𝙏𝙝𝙚𝙣 𝙬𝙝𝙖𝙩 𝙢𝙖𝙠𝙚𝙨 𝘾𝙤𝙨𝙩𝙘𝙤 𝙙𝙞𝙛𝙛𝙚𝙧𝙚𝙣𝙩?
Costco sells in bulk. It has 4,000 stock keeping units (SKU) per store — significantly less than a typical retailer with 30,000 SKUs.
It sells at 𝘢𝘭𝘮𝘰𝘴𝘵 the same cost at which it procures resulting in a gross margin of 11% — lowest in the industry.
𝙏𝙝𝙚𝙣 𝙝𝙤𝙬 𝙙𝙤𝙚𝙨 𝙞𝙩 𝙢𝙖𝙠𝙚 𝙢𝙤𝙣𝙚𝙮?
Costco is a membership only retailer i.e., you need to pay membership fees to buy from Costco.
𝘔𝘦𝘮𝘣𝘦𝘳𝘴𝘩𝘪𝘱 𝘧𝘦𝘦𝘴 from its loyal customer base of 72M (renewals 90%+) 𝘢𝘤𝘤𝘰𝘶𝘯𝘵 𝘧𝘰𝘳 𝘰𝘯𝘭𝘺 2% 𝘰𝘧 𝘵𝘰𝘵𝘢𝘭 𝘳𝘦𝘷𝘦𝘯𝘶𝘦𝘴, 𝘣𝘶𝘵 𝘮𝘢𝘬𝘦 𝘶𝘱 𝘮𝘢𝘫𝘰𝘳𝘪𝘵𝘺 𝘰𝘧 𝘵𝘩𝘦 𝘰𝘱𝘦𝘳𝘢𝘵𝘪𝘯𝘨 𝘪𝘯𝘤𝘰𝘮𝘦.
I had valued Costco 4 years ago at ~$300 a share — close to its then share price — when it had ~55M members and 750+ stores. Since then it has added 100+ stores.
With investor money chasing fewer good retailers and with the expectation of Costco potentially doubling its current store footprint given global expansion, the company has seen its valuation multiple expand and the stock is up ~3x in 4 years.
In a tough industry where many companies have gone bust and many others are struggling, Costco stands out as a mass retailer.
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Link to my valuation video of Costco — from 4 years ago.
In this video, you can learn the following:
1. How to project revenue drivers for a mass retailer like Costco?
2. How to model capital expenditure for expansion — to support future revenue growth?
3. How to build a 3 statement model to value such a business?
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