Could Costco (COST) Collapse?

Many people will wonder if Costco (COST) could collapse because of its high stock price.

For example, Costco’s share price fell from $566.71 on 3 January 2022 to $462.65 on 23 December 2022. I consider Costco overpriced and ready for a fall. Yet many value investors still consider Costco (NASDAQ: COST) a value investment because of its expanding membership.

For instance, the number of Costco card holders worldwide grew from 98.5 million in 2019 to 105.5 million in 2020 to 111.6 million in 2021, Statista estimates. That means 111.6 million people and organizations were paying $60 to $120 for Costco memberships in 2021.

How Much Money is Costco (COST) making from memberships?

Notably, Statista estimates 50.2 million people worldwide were paying $120 a year for a Costco Gold Star membership in 2021.

Another 49.9 million people worldwide were paying $60 for a Costco Household Membership in 2021. Plus 11.6 million enterprises were paying $60 for a Costco Business Membership in 2021.

I estimate Costco (COST) made $6.024 million from Gold Star memberships, $2.994 billion from Household Memberships, and $696 million from Business Memberships in 2021. Thus, I estimate Costco made $9.714 billion from membership fees in 2021.

Hence, the membership fees generated $9.714 billion in float for Costco in 2021. To explain, float is a stream of cash a company can tap for expansion, covering expenses, and financing. Famously, Warren Buffett used the float from newspaper subscriptions and insurance premiums to build Berkshire Hathaway (BRK.A).

How Much Money is Costco Making?

Costco Wholesale (COST) generates enormous amounts of revenue with its business.

For example, Costco reported $54.437 billion in quarterly revenues and $6.668 billion in quarterly gross profit on 30 November 2022. Those numbers rose from $50.363 billion in quarterly revenues and $6.411 billion in quarterly gross profit on 30 November 2021.

However, the quarterly gross profit fell from $8.533 billion on 31 August 2022. Similarly, the quarterly revenues fell from $72.091 billion on 31 August 2022. In contrast, Costco’s quarterly operating income rose slightly from $1.693 billion on 11 November 2021 to $1.751 billion on 11 November 2022. The quarterly operating income rose to $2.497 billion on 31 August 2022.

Costco is capable of enormous revenue growth. For example, Stockrow estimates the revenues grew by 43.14% in the quarter ending on 31 August 2022. However, the revenue growth rate fell to 4.88% for the quarter ending on 30 November 2022. Yet, Costco experiences enormous revenue shrinkage, the revenues fell by -16.08% in the quarter ending on 31 May 2022.

How Much Cash is Costco (COST) generating?

The latest cash flow numbers I found for Costco (COST) are from 31 August 2022.

For example, Costco reported a quarterly operating cash flow of $2.506 billion on 31 August 2022. The quarterly operating cash flow fell from $2.94 billion on 31 August 2021. In contrast, there was an ending cash flow of -$990 million on 31 August 2021. The quarterly ending cash flow fell from $12.751 billion on 30 November 2021.

Hence, Costco’s cash flow is falling. Yet Costco still pays its debts. Costco reported a quarterly financing cash flow of -$1.94 billion on 31 August 2022. The quarterly financing cash flow rose from -$719 million on 31 August 2021.

Appealingly, Costco’s total debt fell from $7.466 billion on 30 November 2021 to $6.543 billion on 30 November 2022. So Costco has less debt. Conversely, Costco has less cash. For instance, Costco’s cash and short-term investments fell from $13.476 billion on 30 November 2021 to $11.673 billion on 30 November 2022.

What Value does Costco (COST) offer?

Costco (COST) has accumulated some value. For example, it had $66.027 billion in total assets on 30 November 2022. The total assets grew from $64.149 billion on 30 November 2021.

Plus Costco operates an impressive footprint with 847 stores worldwide on 7 December 2022. Costco’s ecosystem includes 583 locations in 46 US states and Puerto Rico, 107 locations in nine Canadian provinces, 14 stores in Taiwan, 18 stores in South Korea, 31 stores in Japan, 14 locations in Australia, 40 stores in Mexico, four stores in Spain, one store in New Zealand, two stores in France, two stores in the People’s Republic of China, one store in Iceland, and an one store in Sweden.

Interestingly, the average Costco warehouse store size is 146,000 square feet. However, Costco stores can be as small as 80,000 square feet and as large as 230,000 square feet.

Costco claimed to have 120.9 million cardholders and 66.9 million household card members on 20 November 2022. Plus, Statista estimates Costco’s 2021 e-commerce sales at $14.8 billion worldwide. Statista projects Costco’s e-commerce sales could grow to $25.5 billion in 2026.

How Safe is the Costco (COST) dividend?

The principal attraction at Costco (COST) is the dividend. For example, Costco has scheduled eight 90₵ quarterly dividends between 17 February 2023 and 12 November 2024.

Costco shares offered a $3.60 forward dividend a 0.78% forward dividend yield on 23 December 2022. Thus, Costco is a terrific stock, but people will wonder how safe the dividend is. After all, Costco’s revenues and revenue growth can shrink.

I think Costco’s dividend is safe because inflation and economic turmoil encourage Costco shopping. However, I believe the Supply-Chain Crisis could limit Costco’s future growth. For example, shipping times between the US and China rose from two weeks to 120 at the height of the Crisis, Business Insider estimates.

Will the Supply Chain Crisis destroy Costco (COST)?

Last year’s supply chain supply chaos is over, but new threats loom. For example, US inventory ratios are still lower than in 2019. Hence, supplies of some Costco merchandise could be lower.

Moreover, labor trouble could disrupt supply chains. For example, the International Longshore and Warehouse Union, which represents workers at the ports of Los Angeles and Long Beach, lacks a contract, Bloomberg reports. That means a strike at those ports is possible.

To explain, Los Angeles and Long Beach are America’s largest ports where most of the freight from China lands. If a strike closes those ports, the supply chain could shut done. Other labor troubles that could hurt Costco include the ongoing railroad dispute and a possible UPS (UPS) strike in 2023.

The Chinese Threat to Costco (COST)

Beyond that, there are problems in China. In particular, the unrest sparked by Secretary General Xi Jinping’s idiotic zero COVID-19 lockdowns. The unrest is the worst since the Tiananmen Square uprising back in 1989.

Moreover, China could face a massive COVID-19 outbreak because of the lack of vaccines in the country. CNN reports COVID-19 brought daily life in Beijing to a standstill on 14 December 2022. Similar outbreaks could hurt Costco (COST) if they close ports, factories, or railroad. That could keep merchandise from reaching Costco’s shelves.

I predict Costco will survive, but its profits and share price could fall because of supply chain disruptions. However, I think the Costco dividend is safe for the foreseeable future.