Buffett’s move is surprising on multiple fronts. First, Costco is a business that is right in Buffett’s wheelhouse — an easy to understand retailer with a wide moat around its business. And two, Buffett’s righthand man Charlie Munger continues to sit on Costco’s board (since 1997).
Whether the exiting of the position in Costco signals Munger’s impending departure from Costco’s board (Munger is 96 years ago, after all) or Buffett’s belief Amazon (AMZN) is really the one to beat in retail’s future (he owns 533,000 shares in Amazon per the new filing) is unclear.
But here are several other reasons that Buffett’s sale of his Costco stake likely has caught a few folks on the Street off guard — and may be ill-timed.
A special dividend is here
Many analysts on the Street were eagerly awaiting Costco to finally enact a special dividend. Costco had an outsized $12 billion-plus in cash on its balance sheet compared to only $7.5 billion in total debt exiting its most recent quarter. So now was a good as time as any to reward shareholders.
Costco’s business of selling bulk merchandise to loyal members has been ideal for the COVID-19 pandemic. Members stocked up on food and cleaning products early on in the pandemic, and appear to be doing so again with infections back on the rise.
The company’s October same-store sales surged 14.4%. E-commerce sales rose a blistering 91%. Costco’s overall same-store sales have gained by mid to high double-digit percentages in the past five months, outpacing trends being seen at rivals Target and Walmart and hinting at market share gains pre-holiday.
“We continue to believe Costco is a core long-term holding and that it has so often showed that it can be a winner in different environments,” wrote JPMorgan retail analyst Christopher Horvers in a recent note to clients. “The company has been a consistent share gainer and we continue to prefer its higher income consumer.”
Horvers rates Costco shares at Overweight with a $406 price target (Monday’s closing price was $379.79).
Buffett could be leaving upside on the table as Costco knocks the cover off the ball this holiday season… as all indications suggest will happen.
Costco is loved worldwide… and having success
While Walmart (WMT) slowly pulls back from its international operations (see recent sales of majority stakes in its Japan and UK businesses) after years of struggles, Target focuses on the U.S. (it struck out in Canada), and Best Buy is OK with just doing business in the U.S. and Canada — Costco is proving its bulk-selling model works overseas.
For the nine-months through October, Costco’s “other international” segment saw same-store sales explode 19%. By comparison, U.S. same-store sales rose 13.6%. Costco’s “other international” segment consists of 39 stores in Mexico, 29 in the UK, 27 in Japan, 16 in Korea, 13 in Taiwan, 12 in Australia, three in Spain and one each in Iceland, France and China.
Costco operates 800 stores worldwide.
The strong foothold in overseas markets puts Costco in the catbird seat to widen its competitive moat versus others in retail over time. For Costco, that means more recurring revenue from global memberships to build more e-commerce capabilities and warehouses. It’s the ultimate shareholder value creating flywheel.