Costco (COST) is still thriving amidst the retail apocalypse, the latest financial numbers reveal.
For example, Costco Wholesale (NASDAQ: COST) recorded a gross profit of $5.74 billion on revenues of $44.411 billion for 3rd Quarter 2018. Additionally, Costco reports an operating income of $1.446 billion and a net income of $1.043 billion for the quarter.
Best of all, Costco achieved a revenue growth rate of 4.99% for 3rd Quarter 2018. Thus, Costco is still growing as retailers like JC Penney (NYSE: JCP), Barnes & Noble (NYSE: BKS), and Sears are dying around it.
Is Costco (COST) a Retail Vulture?
Obviously, cynics will accuse Costco of being a retail vulture that is feasting off the carcasses of those historic retailers.
To explain, Costco is taking Penney’s clothes businesses, Barnes & Noble’s book sales, and hardware and clothes from Sears. Conversely, Costco is simply drawing more traffic as those retailers close off stores.
If Costco (COST) is a retail vulture, the flesh it is feasting upon is cash. In fact, Costco reports an operating cash flow of $1.554 billion and a free cash flow of $498 million for 3rd Quarter 2018.
Impressively, Costco reported $6.055 billion in cash and equivalents and $1.204 billion in short-term investments on 2 September 2018. Hence, Costco had $7.259 billion in cash reserves at the end of 3rd Quarter.
Can Costco (COST) compete with Walmart and Amazon?
That is impressive, but far below the cash levels at Costco’s two most dangerous competitors.
For instance, Amazon (NASDAQ: AMZN) reports cash reserves of $29.765 billion for 30 September 2018. In detail, Amazon records $20.425 billion in cash and equivalents and $9.34 billion in short-term investments for that day. Meanwhile, Walmart (NYSE: WMT) records $9.174 billion in cash and equivalents 31 October 2018.
Hence, Costco (COST) may not have the cash to compete with Walmart and Amazon. Amazon, in particular, has the cash to make massive expansions.
How Amazon Delivery threatens Costco (COST)
For example, Amazon is ordering 20,000 Mercedes-Benz Sprinter delivery vans from Daimler, The Seattle Times reports. The vans are a threat to Costco because Amazon will use them to deliver Prime orders.
Obviously, Amazon Prime is Costco’s greatest competitor. To explain, Amazon Prime is a subscription service that sells almost everything Costco carries.
Moreover, Prime is far more convenient than Costco. Specifically, you can shop at Prime from your couch and never have to go to a store. That is a capability Costco will have a hard time matching, even with a successful website.
To make matters worse for Costco, Prime Now offers same-day delivery. A related problem is that 95 million Americans are spending $12 a month on Amazon Prime memberships, Statista calculates. Hence, those people have a strong incentive not to spend $60 to $120 on a Costco subscription.
How Kroger Threatens Costco (COST)
Strangely, America’s largest traditional grocer Kroger (NYSE: KR) is becoming a huge threat to Costco (COST) with two moves.
First, Kroger is greatly expanding its online order and delivery capabilities. Notably, Kroger is offering Instacart delivery from over 1,600 stores, Digital Commerce 360 claims. For instance, Kroger expanded grocery service in Atlanta, Nashville, and Memphis in August.
Additionally, Kroger is revamping its in-house delivery capacities. In particular, the ClickList has been rebranded as Kroger Ship. In detail, Kroger Ship offers next-day orders and free-shipping for orders over $35, TechCrunch reports. All other orders will cost $4.99.
Kroger and Ocado’s Robots threaten Costco (COST)
Second, Kroger is building next-generation robotic fulfillment centers with the help of Britain’s Ocado Group PLC (LSE: OCDO). Specifically, Ocado’s fulfillment centers use swarms of robots to pull and pack grocery orders quickly.
Hence, Kroger could fill thousands of grocery orders in a few hours. Under those circumstances, Kroger could deliver groceries in less than two hours.
Kroger owns 6% of Ocado which will help it build 20 fulfillment centers in the US. Kroger and Ocado are planning to open their first joint fulfillment center in Monroe, Ohio, outside Cincinnati.
The Kroger/Ocado partnership is a direct menace to Costco because it could give Kroger grocery delivery capabilities rivaling or exceeding those of Amazon. To explain, people could buy all the groceries they want without having to drive to Costco (COST).
Furthermore, Kroger could be able to offer lower prices than Costco and offer free delivery. Hence, the rationale for spending $60 on a Costco membership vanishes.
Will Costco (COST) Stop Growing
Under these circumstances, Costco Wholesale is likely to stop growing. In fact, I think Costco’s revenues are likely to contract soon.
To explain, Costco will have a hard time selling memberships to younger people who order everything online. Moreover, many of those people will not shop at brick and mortar stores and some of them will not own cars.
A looming crisis is the aging and dying off of Costco’s main shopper demographic the Baby Boomers. For example, Pew projects the number of Boomers (persons aged 52 to 72) to fall by one million between 2016 and 2019, Pew Research estimates. In particular, Pew notes there were 74 million Boomers in 2016 but that number could shrink to 73 million by 2019.
Thus, Costco could soon face a shortage of suburban dwelling Baby Boomers willing to invest two to three hours in shopping at its stores each week. A related problem is that people buy less as they get older, so they will be less likely to go to Costco.
Obviously, Costco will need to sell memberships to Americans under 50 to survive. Means of reaching those people increased delivery services and smaller stores in urban areas. Those are two very expensive propositions and Costco may not have the cash to finance them.
How safe is Costco’s (COST) Dividend?
Consequently, I think Costco Wholesale (NASDAQ: COST) is a superb dividend stock that Mr. Market is overpricing.
On the negative side, I think the $228.65 price Costco was trading at on 7 December 2018 was unjustified. Specifically, I think Costco has little growth potential and a lot of exposure to aggressive to aggressive competitors like Amazon and Kroger.
On the positive side, Costco paid a nice dividend of 57¢ on 23 November 2018. Uniquely, that dividend grew by 7¢ in 2018, for instance, Costco paid a 50¢ dividend in February.
Why Costco Could Cut its Dividend Soon
Costco shareholders were enjoying a dividend yield of 0.99%, an annualized payout of $2.28 and a payout ratio of 33.5% on 30 November 2018. Therefore, Costco is a good dividend stock.
However, I think the Costco dividend could shrink in coming years. To explain, I believe the market will force Costco to make expensive upgrades to its infrastructure to compete with Amazon, Walmart, Kroger, Target (NYSE: TGT), and other expanding retailers.
Costco will need cash to fund things like robotic fulfillment centers and cutting the dividend is a logical way to get that cash. Hence, investors should be leery of Costco. I think this stock and its dividend have no place to go but down.