Costco is pulling ahead of competition through superior management.

Implications: -          Costco debatably has the strongest management team in the vast retail sector. Although this dynamic is probably “baked” into the valuation of the company it is still under rated and yet to be a neutral factor.

Analysis:  -          One of Costco’s (COST) large advantages over its closest competition (Sam’s Club and BJ’s Warehouse) is the diversity in the products they offer and sell. Their mixed assortment of Sundries, Food, Hard lines, Soft lines and other adjuvant businesses are all important and no one area accounts for more than a third of the business. This diversity mitigates the slow down in the macro economic conditions we are now experiencing. -         


A large % of Costco’s business is B to B which is less sensitive to the day to day pressures of filling the gas tank and paying for the groceries. Along with their International business (Canada, UK, Mexico, Korea and Japan) COST is better insulated from the tough domestic economic conditions. -         


COST is in a position to apply a bit more pressure to their suppliers but seem a bit reticent to strong arm the vendor community. This is of course positive and negative. In the short term they could experience margin growth but in the long term they run the risk of alienating their vendor matrix. -         


The debt COST has on the books excluding their lease obligations is about half of their competition in this sector which sets them up nicely for both domestic expansion and international growth. There is indeed cannibalization taking place domestically but management has the opinion that they would rather sacrifice a bit of top line sales in order to dominate the markets they are strongest in. -         


COST needs to be careful of controlling expenses while not eroding what got them to the dance in the first place. With the rising payroll expense due in cause that the average employee makes twice that of the competitions (it pays off through productivity) controlling the rest of the SG&A is imperative for management.   -         


With the top flight management team execution needs to remain seamless as Costco has plenty of competition from BBY, Loews, HD, and all the other big box retailers. This is for sure a fluid dynamic but Costco is winning the game as of now.