Costco (NASDAQ: COST) went public on December 5, 1985, at a cost of $10 per share ($1.67 adjusted for stock splits), and closed trading on November 3 in a price of $371.96.
This is an impressive gain by any measure. Over a period of nearly 35 years, Costco stock has experienced a compound annual growth rate (CAGR) of around 16.7%, excluding dividends. On this same stretch, the S&P500 generated annual returns of only about 8.3%.
A $1,000 purchase of the Costco IPO could be worth nearly $223,000 today. Let's see how Costco could produce such stunning returns.
Membership warehouses
Costco may be the warehouse leader retail space, with 800 pitches in total by August 30 mainly in the usa, Canada, Mexico, United Kingdom and Japan. The company's focus on selling high quality merchandise at the smallest possible prices has attracted a loyal subscriber base.
Image source: Getty Images.
CEO Craig Jelinek highlights this strategy\”Costco has the capacity to deliver affordable prices and better values by eliminating virtually all of the frills and charges historically associated with conventional wholesalers and retailers, including vendors, luxury buildings, delivery, invoicing and accounts receivable. We operate a tight operation with extremely low overhead rates, allowing us to pass through significant savings on to our members.\”
Net sales in the last fiscal year totaled $163.2 billion, making Costco one of the largest companies in the world. Achieving this sort of scale ultimately benefits shoppers, as Costco's size continues to allow it to buy inventory at advantageous costs. It's what got the company to where it is today, and it's a virtuous cycle that's difficult to stop.
Costco account 58.1 million households like having memberships, the main supply of profit for that business. Since its overarching goal is to lower prices for customers, Costco earns nothing from merchandise sales and instead derives the majority of its profits from membership fees. Having a membership model drives loyalty and provides Costco the opportunity to still delight customers, that has served the organization well historically.
what a year it was
Even using what is a turbulent 2022, the stock is up about 29% this year only. The onset of the coronavirus pandemic has highlighted the essential nature of Costco's business. The market recognizes this, rewarding the stock having a price/earnings ratio multiples of 42 compared towards the Nasdaqit is P/E ratio of 24. Quality companies warrant a greater multiple compared to overall stock exchange.
Investors were probably wondering in which the size of a Costco business could find development in the near future – then, 2022 arrived. This year has accelerated a previously existing transition to e-commerce, and Costco is a huge beneficiary. During the last quarter, which ended August 30, online sales climbed 90.6% of the time of 1 last year.
While it's hard to say just how long this hyper-growth may last in a post-pandemic world, Costco is well positioned take benefit of consumers' growing appetite to transact where and when they want.
A learning experience
The appreciation in Costco's stock price since its 1985 IPO would have made investors wealthy had they had the foresight to predict what the company might become and hold through its good and the bad, both probably unlikely.
But I believe there's an important lesson we are able to learn here: owning high-quality companies in the future and letting them weather the inevitable volatility can lead to market outperformance. Costco may not deliver outsized returns over the next 35 years, but investors can continue to apply this framework when looking for the following big winner.
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The views and opinions expressed herein are the views and opinions from the author and do not necessarily reflect those of Nasdaq, Inc.
