Costco May Be America's Best Run Company

Retail

Published: September 3, 2015 6:42 am

Most of the headlines about America’s best-managed companies may go to Web 2.0 corporations, led by Facebook Inc. (NYSE: FB) or long-time successes such as Apple Inc. (NASDAQ: AAPL) and Amazon.com Inc. (NASDAQ: AMZN). Yet Costco Wholesale Corp. (NASDAQ: COST), which operates in a brutal industry that is decades old, may be the best run company in America. Costco reported extraordinary sales numbers in a sector that has largely fallen apart.

For the year that ended on August 31, Costco posted same-store sales that rose 7%. That makes it the envy of Wal-Mart Stores Inc. (NASDAQ: WMT) at one end of the spectrum and companies like Macy’s Inc. (NYSE: M) at the other. Costco’s revenue for the year was up 3% to $113.7 billion. The figures seem mundane against those of e-commerce giant Amazon. However, Costco fights a ground war in brick-and-mortar retail, primarily, which is crowded with desperate competition that will do nearly anything to hold eroding sales, and a market share battle that is part of a zero sum game.

The 52-week improvement at Costco has been adjusted so that the primary results are for its core business. They exclude the effects from gasoline price deflation and foreign exchange.

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Wall Street’s evaluation of Costco has been positive. Despite the recent market sell-off, its shares have risen by 12% over the past year. Walmart’s have fallen 16% and Macy’s by 6%. Shares of deeply wounded J.C. Penney Co. Inc. (NYSE: JCP) and Sears Holdings Corp. (NASDAQ: SHLD) each have dropped 14% over the same period.

Experts would argue that one of the keys to Costco’s success is its membership model. Over 50 million people have memberships, which cost between $55 and $110 a year. Of course, any of the other large retailers could match the successful model, but as they try to hang on to customers, up-front fees would drive these customers away. Costco built the model years ago, and it cannot be replicated now.

Another argument in Costco’s favor is that its merchandise tends to be of better quality than that of other big-box retailers and department stores. If so, it is because Costco has the financial leverage to stock the higher priced inventory and the brands to get people to come and pay for memberships as access to that inventory.

Costco is 40 years old, relatively young compared to other national retailers. Some might argue that it did not get into the bad habits of older retailers, most of which have begun to disintegrate financially, if they have not already. However, there is nothing about the Costco model that cannot be mimicked. As other brick-and-mortar retailers struggle, they cannot afford the time and risk to take such a radical redirection.

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