Costco Wholesale Corporation (NASDAQ:COST) stock has a well-deserved reputation for breaking all retail rules. This refusal to play the same game as other retailers has paid off well for long-term COST stock investors.
Their stocks have generated a very respectable 191% gain over the past five years. If you factor in the pullback that has hit COST year-to-date, the number is actually 255%. This retreat – and the opportunity it offers – is what I’m looking at today.
Like I said, Costco doesn’t follow the same playbook as other retailers. The company’s business model puts it in an advantageous position even in the face of challenging economic factors like interest rates and inflation fears that have wreaked havoc on the stock market in 2022.
COST stock was hit by these fears. It is not immune to a broad reaction to economic concerns. But in the case of Costco, seeing its shares beaten represents a rare opportunity to buy at a discount. Here’s why now is the time to add COST stocks to your long-term growth portfolio.
Costco’s Different Way of Doing Things
Costco defies traditional retail rules in many ways. Much of Costco’s appeal is in its groceries, but it also offers clothing, televisions, computers, tires, and more. Despite the wide range of retail land (and physical space) that a Costco store covers, the number of products you’ll find inside is surprisingly limited.
In 2020, the average American supermarket carried over 31,000 different items. By comparison, Costco stores carry about 4,000. In addition to “breaking the rules,” many of these items are carried for a limited time and then removed.
Shopping at your local grocery store or department store is free. Anyone can just walk in, grab a cart and start shopping. Costco is for members only. Shopping at a Costco store requires paying a subscription.
This has an interesting effect on consumers. In 2017, the Financial item interviewed Allison Johnson, then a professor of business with a focus on consumer psychology at Western University’s Ivey Business School. Professor Johnson explained the effect of this paid Costco membership:
“Once you’ve paid to belong to something, once there’s a cost of entry, you attach more strongly to it. There is a psychological sunk cost and exclusivity. They check your card at checkout. It gives the impression that something special is going on in there.
All of these factors work in Costco’s favor through tough times and good times alike. Selling large quantities of limited items gives Costco more leverage with suppliers of those products. They will be more reluctant to pass on the increased costs than they would with a retailer where their product is one of more than 30,000 on store shelves. Customers who pay for a subscription will be even more determined to get their money’s worth as inflation and interest rates bite.
Rising inflation and interest rates have a benefit for Costco
As I wrote several weeks ago, there is another reason why rising inflation and interest rates have an advantage for Costco. Under these conditions, a classic consumer coping strategy is to save money by buying in bulk. This reduces the number of trips to the store, but more importantly, it reduces overall costs. Costco is considered the gold star for bulk buying opportunities.
In its first quarter 2022 results (released last December), Costco added 800,000 new paying members. Equally important, it retains these members, with annual renewals at 91.6% in the United States and Canada. Sales were also up 16.7% year over year.
Even large items like televisions have a potential advantage for Costco. When rising prices and interest rates make buying the latest big-screen TV from an electronics retailer expensive, Costco offers lower-cost alternatives. Many may be last year’s models, but they’re premium brands and priced low enough that financing isn’t even necessary.
Inflation hasn’t taken a bite out of Costco’s business. On the contrary, it becomes a catalyst for more consumers to buy a membership.
Costco does just fine in “normal” times. It thrived during the pandemic, when shoppers stocked up on essentials while minimizing travel. And so far so good as inflation and the threat of higher interest rates are starting to bite.
The current decline in COST actions is not without precedent. Stocks have stumbled several times over the past five years. But the downturn doesn’t last long and they always come back strong. In fact, that’s the history of COST stock since 2010. In case you’re wondering, it’s grown nearly 750% since then.
If you’re looking for a long-term growth stock you can rely on for your portfolio, COST should be on your list. It gets a strong “A” grade in portfolio binder. The current price, which has shares down 9% year-to-date, is a chance to add it to a Costco-sized discount.
At the date of publication, Louis Navellier had a long position in COST. Louis Navellier has held (neither directly nor indirectly) any other position in the securities mentioned in this article. The InvestorPlace research staff member primarily responsible for this article has not held (directly or indirectly) any position in the securities mentioned in this article.
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