COST - Costco Company Profile
Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online.
Company description from FinViz.com.
We all know the story. Amazon bought Whole Foods and Costco shares lost over $30. Fast forward three months and Costco reported strong earnings but analysts still believed Whole Foods was going to kill them. Shares fell $13.
Let me put this in caps. IGNORE WHOLE FOODS. They are an entirely different business model and even with Amazon behind them, they are no threat to Costco. Costco operates 741 retail warehouses, each 4 times bigger than a Whole Foods store. Whole Foods only has 346 stores. At Costco you can buy food, diamond rings, cameras, large screen TVs, clothing, drugs, discount eye glasses, GE appliances, cruises to anywhere in the world and caskets among thousands of other items. Whole Foods has food.
Costco reported earnings of $2.08 that beat estimates for $2.02. Revenue of $42.3 billion beat estimates for $41.55 billion. Those numbers were up from $1.77 and $36.56 billion in the year ago quarter. US same store sales were up 6.5% and online sales were up 30%. There was NO weakness from the Whole Foods acquisition.
Paid memberships rose 274,000 to 18.5 million. That equates to an addition of 16,000 per week. Business members had a 94% renewal rate and Gold Star members an 89.3% renewal rate. They ended the quarter with $5.78 billion in cash, up more than $1 billion from the year ago quarter.
Costco rolled out a free two-day delivery service for orders over $75 with same day delivery at 376 stores through Instacart.
Shares were knocked for a loss despite the strong results because analysts are still only looking at the surface comparisons between Whole Foods and Costco. The decline stopped at $155 and did not even come close to strong support at $155. The weakness lasted five days.
On Friday, JP Morgan released the results of a recent survey showing Costco grocery prices were a whopping 58% cheaper than Whole Foods. JP Morgan said Whole Foods and Costco actually have very little in common other than a few grocery items and Costco wins hands down.
That report lifted Costco shares by $2.63 on Friday but the stock has a long way to go to recover lost ground.
In another recent survey by BMO Capital, they found that Costco consistently had lower prices and faster shipping than Amazon. They surveyed 16 categories and Costco was an average of 7% cheaper than Amazon. Shipping took an average of 4.5 days from Costco compared to 5.5 days from Amazon. Wal-Mart and Jet.com had prices that were 18% higher than Amazon and average shipping was 9.8 days.
Costco also has its own private label brand in the Kirkland label. Last year Kirkland was the largest selling grocery brand on Amazon. Yes, on Amazon.
We exited the existing January position last Monday and I wrote at the time I wanted to reinstate it with a longer dated option. I am using June options because the 2019 LEAPS are ridiculously expensive.
Buy Jun $165 call, currently $8.70, initial stop loss $148.50
Optional: Sell short Jun $185 call, currently $1.94, initial stop loss $148.50.
Net debit $6.76.