Costco is a fascinating business. You know all those groceries you buy? Yeah, they basically sell those at breakeven and then make all of their profit from the $60 annual membership fees.
Sure thing. Yeah, Costco seems to always trade at a premium valuation because it's such a high quality company. Costco intentionally keeps gross margins around 11-12% and EBIT margins are usually 3%. That is what creates the pricing authority. But at maturity, maybe Costco can get 4 or even 5% margins. At 5%, that's 20x EBIT, not crazy. But on a trailing basis, 30x EBIT is definitely on the more expensive side. But for the moat and returns on capital and working capital dynamics, investors are very willing to pay the price. At what price would you be interested?
Hey, thanks for reading! I'm pretty sure I'm incorrect since this is from the 10-K, "Gross margin was also negatively impacted by one basis point due to increased 2% rewards."
I can't imagine gross margins would decrease if the suppliers took on the rebate. Thanks for pointing that out! I may have been mistaken since, under certain agreements, I've heard that suppliers can be on the hook for large returns, like big electronics.
It would be great if you could mention the valuation of costco, as well. It is basically too expensive
Price to Cash Flow Per Share of 29 is too high compared to industry. Is it because they collect cash in a few days?
Sure thing. Yeah, Costco seems to always trade at a premium valuation because it's such a high quality company. Costco intentionally keeps gross margins around 11-12% and EBIT margins are usually 3%. That is what creates the pricing authority. But at maturity, maybe Costco can get 4 or even 5% margins. At 5%, that's 20x EBIT, not crazy. But on a trailing basis, 30x EBIT is definitely on the more expensive side. But for the moat and returns on capital and working capital dynamics, investors are very willing to pay the price. At what price would you be interested?
I agree that this is a great post. So effortlessly and succinctly illustrates a concept which I was completely blind to.
Wow, thank you so much Luka!
Brilliant first post - cant wait for more to come. Really fascinating how fast they can turn inventory to cash
Thanks so much! 😄
Nice write up! At the end you mention that suppliers pay the 2% cash back reward for the executive members - where did you find that info? Thanks!
Hey, thanks for reading! I'm pretty sure I'm incorrect since this is from the 10-K, "Gross margin was also negatively impacted by one basis point due to increased 2% rewards."
I can't imagine gross margins would decrease if the suppliers took on the rebate. Thanks for pointing that out! I may have been mistaken since, under certain agreements, I've heard that suppliers can be on the hook for large returns, like big electronics.
Got it- thanks for the reply and keep up the good work!