Costco Wholesale Corp. (NASDAQ: COST) is the largest warehouse retail club company, and its stock returned an exceptional 180% between 2006 and 2016. Expansion of store count, sustained same-store sales growth and strong financial health helped drive above-market returns for Costco. Economic growth and charging equity valuations also supported stock returns during the period.

Price History

Costco stock appreciated 32.7% from June 2006 to its July 2008 pre-crash peak. The 2008-2009 stock market crash drove a steep decline in COST share prices, from $72 to $39 on a dividend-adjusted basis. From the March 2009 low, prices trended strongly upward through the end of 2015, with several noteworthy periods of stagnation. The first half of 2010, the first half of 2014 and the first half of 2015 were all weak growth periods. Costco stock declined approximately 3% in each of these instances, but full-year returns were positive every time.

Operating History

Costco was able to sustain positive growth across nearly the entire 10-year period leading up to May 2016. Only fiscal 2009 had a negative revenue growth rate for the full year, and even this contraction was modest at 1.46%. Costco generated double-digit top line growth in fiscal 2008, 2011 and 2012, leading to a 10-year average rate of 8.18%, as of August 2015. Gross margin has been notably stable, never leaving the range between 12.3 to 13.2% during the decade. Operating margin has been similarly stable, staying within a narrow range between 2.5 and 3.1%. Fiscal 2008, 2010 and 2015 were periods of noteworthy margin expansion within these narrow ranges. Revenue growth and margin expansion drove operating income growth of 17.4% in fiscal 2011, 13.1% in 2012 and 12.6% in 2015, which are relatively high levels for stable companies with Costco's scale. Costco has paid a growing regular dividend with periodic special dividends, further appealing to investors who might move into COST for a more defensive position.

Costco has produced relatively stable efficiency ratios, with inventory turnover falling between 11.5 and 12.8 throughout the entire decade. Asset turnover has been similarly steady. The company's financial health has also been strong, with suitable liquidity ratios and manageable financial leverage. Costco's debt-to-equity ratio of 0.35 is below that of its industry peers, Wal-Mart Stores Inc. (NYSE: WMT), Dollar General Corporation (NYSE: DG), Target Corporation (NYSE: TGT) and Dollar Tree Inc. (NYSE: DLTR). Costco's debt is relatively low despite financial leverage rising as interest rates fell and the company's scale grew.

Market Fluctuations

The Standard & Poor's 500 index rose 62.6% over the 10-year period during which Costco appreciated 180%. Notable decoupling periods occurred from 2011 to 2012 and during the second half of 2014 and the second half of 2015. COST outperformed the market by 16.6 percentage points from August 2011 through the end of 2012. Costco also broke away from the market by 15 percentage points over the second half of 2014 and 19.5 percentage points over the second half of 2015. All of these periods coincided with some of Costco's strongest operational performance. Costco's correlation coefficient to the SPDR S&P 500 exchange-traded fund (NYSEARCA: SPY) was 0.584 between 2006 and 2016. There is a positive correlation to the market, but other factors are clearly also driving COST's stock performance.

Retail Market

The retail market evolved rapidly between 2006 and 2016. Consumer behavior was altered in the long-term by the recession of 2008 and 2009, with many consumers becoming more price conscious and exhibiting more discerning shopping habits. E-commerce represented another major challenge to the traditional retail model, with Amazon.com Inc. (NASDAQ: AMZN) rapidly taking market share from incumbent retailers. The SPDR S&P Retail ETF (NYSEARCA: XRT) returned 130% over the decade, and its performance was very similar to that of COST until the second half of 2015. Tumbling gas prices and weakening economic conditions contributed to poor retail sales figures, but Costco's continued growth and stability through downturns helped buoy shares amid a challenging time for the industry. Over the decade, COST had a 0.559 correlation coefficient to XRT.

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