Meet Yahoo Finance's 2022 Company of the Year: Costco

In a year of rampant inflation—not seen since the early 1980s—Costco (COST) was a warm hug to millions of loyal members by keeping prices for everything from food to gasoline as low as possible, just as rivals were aggressively jacking up prices.

It also provided a warm hug to its fans on Wall Street, producing stellar results from sizable same-store sales increases to its stock price, which got the best of the S&P 500 (^GSPC) index. Not to mention its sales of $222.7 billion in the fiscal year ended October, up a whopping 16 percent.

For that and more—including Costco's continued status as one of the nation's best employers—we named the Issaquah, Washington–based warehouse behemoth our 2022 Company of the Year.

If there were one company that could say rising prices weren't a negative, it was Costco. The Great Inflationary Outbreak of 2022 placed Costco's 842 worldwide stores squarely under the spotlight, offering up yet another opportunity for the 39-year-old retailer to showcase, to investors and members, its low-price leadership chops.

Consider Cephas Sund from Los Angeles, California. The Costco cardholder, who loves organic products, says he shopped at conventional grocery stores prior to 2022, but skyrocketing prices put a hard stop on many of those excursions. "When organic produce at the grocery stores is almost double what it cost at Costco, you (can) see where the savings quickly added up," Sund said.

Sund and other customers we talked to said pretty much the same thing: Costco is a trusted retailer who had their backs throughout a challenging economic year. (That ought to tell you something.)

How? As the cost of items like toothpaste and eggs soared, Costco in most cases was the last to raise prices at its cavernous 146,000-square-foot stores, explained Jefferies retail analyst Corey Tarlowe. "The company is very strict on price, and I think that is evident through its steadfast commitment to its $1.50 hot dog and soda combo, competitive gas prices, and $4.99 rotisserie chickens," Tarlowe explained.

Case in point: As gas prices spiked to more than $5.00 a gallon in the summer, Costco saw lines at its hundreds of U.S. gas stations stretch out onto highways. Why? The company stayed true to its DNA as a wholesaler and kept gas prices at the lowest levels in town. Tarlowe says Costco's gas prices have typically been $0.25-$1.00 a gallon cheaper than the next closest competitor. (GasBuddy, a fuel station app, said Costco was the cheapest fuel station nationwide for the fifth year in a row. )

Costco held the line in other ways, too.

As Walmart-owned Sam's Club jacked up membership prices by $5-$10 in September, Costco held firm. Execs said it wasn't the right time to tax consumers dealing with runaway inflation. (Sam's did undercut Costco's hot dog/drink combo by 12 cents. You can't win them all.)

All of those warm embraces of customers was just Costco being Costco, long-time CEO Craig Jelinek told Yahoo Finance in an exclusive interview inside a new club opening in Lake Stevens, Washington.

"I think first of all, we've been very fortunate. We've got great employees, and every company is only as good as everybody around them," said Jelinek, who has been with the company since nearly the time of its founding in 1984 by Jeffrey Brotman and Jim Sinegal. "We've persevered and, we're very pleased that we've been able to get merchandise and continue to create value for our members and grow our membership base and drive sales."

This isn't a surprise to the retailer's long-time followers on Wall Street.

Goldman Sachs' Kate McShane, for instance, has covered Costco for years. The company's focus on low prices and stellar operational execution is etched in the fabric of the retailer and has served the company well for years in good times and bad, she explained. The "get it done" mindset harkens back to the company's co-founders Jim Sinegal and Jeffrey Brotman, who created a no frills atmosphere that put the member at the center.

"They're definitely one of the best run, best-in-class retailers," McShane said. "We've not necessarily been that surprised Costco has been gaining market share as a result of some of the macroeconomic dynamics."

Experts like McShane believe Costco has gained market share notably in food throughout the pandemic, primarily from selling high quality private label products under its popular Kirkland Signature brand.

Here are some Company of the Year worthy (and Wall Street-pleasing) highlights from the past year:

Costco's same-store sales have out-performed conventional competitors

Costco's U.S. same-store sales for the nine-weeks ended October 30 increased by 10%. By comparison, third-quarter same-store sales for discounters Walmart (WMT) U.S. and Target (TGT) rose by a far slower 8.2% and 2.7%, respectively. Stacked up against its pure play warehouse rivals, Costco's recent sales growth trends are more in line. East Coast warehouse club rival BJ's Wholesale (BJ) saw third-quarter same-store sales increase by 9.7%. Same-store sales at Walmart's Sam's Club, increased 10% in the third quarter. But given that Costco is much bigger than the likes of Sam's, which has sales of about $59 billion, those same-store sales figures are impressive.

Costco had a bang-up year within its key operating metrics

For the fiscal year-ended Aug. 28, Costco posted a 14.4% overall same-store sales increase; a 93% renewal rate for U.S. members; the addition of 7.3 million members; and a slight increase in net profit margins (a win in the hyper inflationary environment). Meanwhile, total cash clocked in at $11.1 billion, representing a hearty 34% of current assets.

Despite 12-months of rock solid financial performance, the stock is down 13% this year, as of Dec. 2, but that still beats the S&P 500 by a couple percentage points. Not bad in a year where bear markets reigned supreme.

"We're really the extreme value proposition," Costco's 30-plus year CFO Richard Galanti told Yahoo Finance of the warehouse chain's financial success in a year of of eye-popping inflation.

But like any other retailer, there are always uncertainties lurking.

Analysts contend Costco's often relatively "expensive" price-to-earnings multiple — reflective of its years of steady and strong financials — requires the company to be perfect operationally at every turn.

"The valuation on Costco, I can I can tell you, does give some people some angst because they are at such a big premium to the market. They're at such a big premium to Walmart and other big box retailers that some people don't totally understand why or they can't really bridge the gap between them," Goldman's McShane said.

Costco didn't have a perfect November, as same-store sales growth cooled versus October, the company reported on Nov. 30. Investors promptly punished the often teflon stock on the view 2023 would bring further sales slowdowns.

Another wild card for 2023 is membership fees. Costco could raise them after years of holding the line, much to the disappointment of Wall Street. That would, of course, increase revenues and profits, but could also turn off some loyal, still inflation-weary, customers.

Costco's last membership fee increase kicked in on June 1, 2017. The warehouse club took its Gold Star membership (the entry level Costco membership) fee up $5 to $60 and executive membership (offers 2% rewards on qualified purchases and other perks) fees increased by $10 to $120.

"You're likely to hear something about this in the next (earnings) call in maybe six to 12 months, I think, and it'll probably be pretty likely that we'll hear something about it at least upcoming on the next earnings call," said Jefferies analyst Tarlowe. He estimates that a membership fee increase could boost Costco's earnings growth by a "mid-single digit percentage" rate. A Costco bull, he doesn't believe such a hike is priced into the retailer's already relatively expensive stock.

Costco's CFO Galanti said the retailer isn't ready to raise the cost of its membership, but it will be something it clearly outlines to Wall Street when and if the time comes. Growth will also be driven by opening 20 to 25 new warehouses a year and the existing business drivers, Galanti added.

In the meantime, Jelinek is paying careful attention to consumer spending this holiday season amid the mixed economic backdrop. Jelinek says he is pleased with the trends in the business to kick off the holiday shopping season, but does see a few warning flags that amount to uncertainties headed into 2023.

"You know, a little bit. A little bit," Jelinek replied when asked if he sees a recession forming in the U.S. "Our jewelry business has slowed down. If you look at the really high-end television sets, they've slowed down. I think right now people are very, very value conscious. They're always value conscious, but I think more so now than ever."

What the 70-year-old Jelinek may see forming, however, is a well-deserved retirement sometime within the next couple of years. In February, Costco promoted Ron Vachris to president and COO. He also joined Jelinek and Galanti on Costco's board of directors.

Vachris, 56, has similar merchant DNA to Jelinek and Costco's founders. He began his retail career at the age of 16 at Price Club, which merged with Costco in 1993. Yahoo Finance briefly chatted with Vachris inside the Washington store opening — he was in true merchant form, walking aisles and chatting with members.

Jelinek played any potential retirement announcement close to the vest.

"Let's put it this way. He's [Ron] president. And we'll let it go at that," Jelinek said when asked about succession, adding he plans to be CEO "for a while."

Costco's faithful members and employees surely would be OK with that timeline.

More Yahoo Finance Company of the Year 2022 coverage:

• Meet Yahoo Finance's Company of the Year: Costco

• How we chose Costco to be Yahoo Finance's Company of the Year

• Costco stock: 5 takes from Wall Street analysts

• Why some of our 'best company' picks didn't stay that way

Brian Sozzi, a former Wall Street analyst, is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube

Source: Read Full Article