Ever since Amazon.com, Inc. (NASDAQ:AMZN) acquired a brick-and-mortar footprint in the grocery world through its acquisition of Whole Foods Market, Inc. (NASDAQ:WFM), Costco Wholesale Corporation (NASDAQ:COST) stock has been a loser.
Source: Mike Mozart via Flickr (Modified)
When the deal was announced in mid-June, Costco stock fell off a cliff from $180 to $167 a share. Since then, Costco stock has just continued to slide lower. Today, it trades for around $162/share.
Why? Amazon is cutting prices at America’s premier grocery story. The net result is increased traffic at Whole Foods and lower traffic at traditional grocers like Kroger Co (NYSE:KR), Sprouts Farmers Market Inc (NASDAQ:SFM), and Supervalu Inc. (NYSE:SVU).
That makes sense. But what doesn’t make sense is that Costco is being thrown in with traditional grocers, as if the company weren’t already the brick-and-mortar version of Amazon.
That misunderstanding is why Costco stock is a buy here.
Lets dig deeper…
Costco Will Be Just Fine
Here’s the thing: Costco will be just fine in the face of lower Whole Foods prices because the big box retailer is much, much more than a traditional grocery store.
Traditional grocery stores don’t have a particularly sticky shopper base. What grocery store most people go to depends on some mix between where they live and who has the best prices. More likely than not, shoppers are going to choose the most conveniently located and affordable grocery store rather than the “best” grocery store in town.
Don’t believe me? Look at the results from a recent survey of grocery shoppers conducted by Morgan Stanley (NYSE:MS) AlphaWise. The survey found that the top two factors for shoppers in deciding what grocery store to shop at is “convenient location” and “lowest/best prices.”
Naturally, when your shopper base isn’t that sticky, you are subject to huge market share losses when a formerly pricey competitor dramatically lowers their prices.
But Costco does have a particularly sticky shopper base. The company has a massive membership base that pays $60 to $120 a year to get access to the Costco perks. Those perks include convenience and affordability.
Prices are low across the board. Items are available for purchase in bulk. Goods range from televisions to groceries to clothes to cosmetic products. Costco locations also have fuel stations with gas prices that are often the lowest in town. They have a food court, which offers tasty meals and treats at affordable prices.
Costco really is an all-in-one shopping experience at an affordable price. It is this crossover of unparalleled convenience and affordability that gives Costco a sticky shopper base. This sticky shopper base means members won’t all of a sudden ditch their Costco memberships because prices at Whole Foods dropped.
Thus, long-term, COST stock will do just fine. This sell-off is dramatically overdone, but the window to buy the dip may be closing.
COST Stock Has a Big Catalyst Around the Corner
COST stock has a pretty big catalyst around the corner in the September sales report.
Amazon cut prices at Whole Foods at the end of August, so the September sales report will be the first full month of Costco operations in this new grocery shopping environment. If those September comparable sales numbers trend in line with prior numbers, this stock could easily rebound back to the $180 level it was at prior to the AMZN/WFM deal.
Excluding the effects of gasoline prices and currency swings, comparable sales at COST increased 5.9% in August. That compares to a 5.3% rise in July and a 6.5% rise in June. If September comps can continue to trend in this 5.3% to 6.5% range, then that would imply that Costco has hardly been affected by the price cuts at Whole Foods.
For all the aforementioned reasons, I think that is exactly what will happen.
Bottom Line on COST Stock
With the September sales report around the corner, the window to buy COST stock at a discount is closing.
So I’m buying COST stock now, with the expectation for pretty big returns in the near-term.
As of this writing, Luke Lango was long COST and AMZN.