casestudyguru.com
Home About

Nick Sleep

Costco
NASDAQ:COST
2002-Present
Industry: Discount Retailer
Category: Low Cost Provider/Wonderful Business

Context
The Costco promise is simple. A annual membership fee of $45/year. Costco will mark up items only 14%.

Why the Company is Mispriced

Alternative View
Costco benefits from economies of scale. Higher volume, better discounts from suppliers.
Higher discounts, more volume.
Costco benefits from a strong culture.
"If I let you do it this time, you will do it again."
They don't play any marketing/psychological pricing. They simply promise the customers low honest prices.
The thesis at the time is based on store density.
It's 21 stores in Washington State implies 1000 US stores and 200 UK stores (284 and 14 at time of writing).
Comparably, Home Depot has 1,500 US stores.
At $30/sh, the company is valued as a cash cow, but with higher levels of profitability (as capacity improves) and modest levels of growth,
the company justifies a $50/sh valuation.
Costco is as perfect of a growth stock as we have analysed.

Result
From 2002 to 2014, Costco stock only doubled. This implies a ~6% CAGR.
However, from 2002 to today, Costco stock has been a 20x, a 15% CAGR

Notably
Sleep coined the term, robustness ratio, amount of money a customer saves compared to how much is earned by shareholders
Sleep estimated GEICO saved customers 1b and made 1b for a robustness ratio of 1:1
Sleep estimated Costco to be 5:1