Costco Bear's Rebuttal
by Rick Munarriz ([email protected])

Iimagine that there's an overhead ramp leading into the Costco bull camp. My fellow Fool took the high road in her opening, and having been outclassed, I am down to the one barbaric battle tactic I have been left with -- bare-fisted reality.

Thy steady stock performance shall make me enough to buy that Range Rover.

That reminds me of a joke I once heard. How do you turn your Costco investment into a Range Rover? You start with Rolls Royce money. You see, Yi-Hsin eloquently stated what a great company Costco was, but never got around to saying what a great stock Costco was -- because it wasn't. After setting what was then all-time highs in August of 1991, the stock took almost six years to lap that mark. The shares have since bounced back, but having barely doubled over the past seven years makes for a shoddy growth stock resume. That said, I can see why my worthy Fool wants a Range Rover; I hear they are good at navigating rocky downhill terrain.

So what is Costco worth? That is the one thing I found blatantly missing from my counterpart's otherwise excellent bullish case -- valuation. How can someone sing the praises of Costco's discount merchandise pricing without taking the time to ring up shares of Costco itself. She concedes that supermarkets have ten times wider selection while producing better gross margins than Costco, but she never takes the time to scan Costco's stock itself. If the bulk wares on the shelf were marked up as high as the company shares, I am sure even Yi-Hsin would stay away from the place. Why would someone pay 30 times earnings for a company growing sales at a third of that clip?

Yi-Hsin rightfully points out how Costco has the highest per-unit sales of any of the warehouse clubs. Of course! They are bigger. They cost more to build. They cost more to run. I'd like to remind her that Rainforest Cafe is the top grossing per-unit restaurant chain in the country. Does size matter? Are we naive enough to believe that whichever tin shack takes to the creatine best is necessarily the victor?

What competitive advantages are we left with? We have the many cost-cutting measures at Costco, something true of the entire warehouse club genre, but in there lies the rub. My Costco defection began shortly after my first son was born five years ago. My wife simply did not want to risk taking him out to a place where racks teetered on high and forklifts barreled down the aisles. It's the irony of it all, that a concept that should appeal to growing families in terms of serving sizes is so repellent in its make-up. My field experiences found the customer base to be mostly independent restaurateurs who clogged up the checkout lines with their cash and carry purchases and childless adults who were stocking up for that one annual bash.

Yi-Hsin paints an optimistic picture of a company with so much real estate left to conquer, but if that is the case, then why has expansion stalled? Even Costco is tired of Costco. Can it be that Costco is, as are all the warehouse chains right now, standing pat to see what the supermarkets will do? And if that's the case, how much longer will it be before competition from the grocers forces the clubs to do away with annual membership fees and spruce up their stores -- moves that will take away from the top and bottom lines, respectively. It is not a rosy future, and it begs one important shopping tip: check both the price and the expiration date before purchase.

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