This post is part of our Battle of the Brands feature. Let us know which brand you prefer, and watch out for more Battle of the Brands posts.
A portfolio manager once said, "If a nuclear explosion hit my city and I had to pick one place to hole-up for a couple of years until all was calm, I would want to be at a Costco store. It has everything any human being could ever want or need." Well, I don't know if I could spend a couple of years in a Costco store, but no problem with a couple of hours!
Sam's Club, a division of Wal-Mart Stores Inc. (NYSE: WMT) versus Costco Wholesale Corp. (NASDAQ: COST): they have collectively changed the way people shop. The differences are profound between the two, yet conceptually they are very similar. Both "warehouse" concepts sell in bulk fashion. If you're looking for a small jar of Grey Poupon mustard, forget either of these two warehouse stores. But, if you want two side-by-side 16-ounce jars of Grey Poupon, enough to satisfy a football team, then you have come to the right place.
As similar as these two are, the differences do exist. Costco offers tremendous prices to its customers (club members) and quality. Costco has figured out the consumer will come in with a set list of items to be purchased, only to be enticed to expand that list as they walk the store. Strategically placed "special" items, or Costco employees serving out free samples of delicious food and drink items not normally found on the customer's list. It's brilliant marketing: on-site demonstrations and/or sampling of the product. "An impulse purchase" is the expression I have used many, many times as I've explained to my wife why I bought this or that.
Costco has a private label brand named Kirkland that has become synonymous with quality and low prices. The simple business model at Costco is to mark up the general products by 13% to 14%, and that's after they have acquired the product in bulk at a very low price. The private label, Kirkland, carries a similar mark-up of 14% to 15%, just a little higher than general merchandise.
Costco has the most loyal employees because they pay exceptionally well, $13 to $14 per hour, with full benefits. Sure, Costco could cut corners on their labor costs, but they have this funny idea about actually offering customers something unusual -- it's called service. Amazing for a store that big to add the human touch.
Sam's Club offers similar general items as Costco, but the choices can be limited and the quality, upscale selections are marginal. The environment at Sam's can be a little disheartening: mediocre lighting, cluttered aisles, and very little in customer service. Sam's Club will fullfill the "list" as previously mentioned, but Costco enhances the list.
The proof is in the pudding. Costco has beaten Sam's Club in the critical metric of same-store sales 64 of the past 73 months. The other vital, key component is that 87% of Costco members renew their memberships. The club memberships are tiered from $45 per year to $100 per year. Customer loyalty is fiercely guarded at Costco, and having happy, well-compensated employees is important in building that customer loyalty.
Costco currently has 490 warehouse units throughout the United States and key foreign locations, such as the United Kingdom, Mexico, and Taiwan. Sam's Club has 567 units, also spread out strategically in the U.S. and beyond. Costco sells more than Sam's on a per-square-foot basis and, of course, renews its customers memberships at a higher rate than Sam's Club.
Costco carries a market capitalization of $24 billion and has a clear opportunity to build the company to a $100 billion market cap. The market size and acceptance will easily allow Costco to double the store base over the next decade. Costco's consensus estimates for August 31, 2007, fiscal year call for revenues of $65 billion and earnings per share of $2.55. The 2008 numbers are revenues of $73 billion and earnings per share of $2.90 to $2.95.
Sam's Club numbers are part of the larger Wal-Mart numbers. The market capitalization of Wal-Mart is currently $200 billion and consensus estimates for January 31, 2008 and 2009 call for revenues of $381 billion and $410 billion, and earnings per share of $3.20 and $3.50 respectively.
Clearly, from an investor's point of view, the better growth story is Costco. From a shopper's point of view, the more pleasant experience is also at Costco.
For more of Georges Yared's stock ideas, please visit Yared Investment Research.
Be sure to vote in our poll for Costco or Sam's Club as your preferred brand, and let us know why you love it in the comments. Results of all Battle of the Brands match-ups coming soon.