Costco Corp should be Buffett’s next bulk deal

Warren Buffett says “nothing can stop America.” To put his money where his mouth is and spend some of his $137 billion stash before this crisis is over, he wouldn’t have to look far. If there’s one company that warrants the dealmaker’s attention, it may be Costco Wholesale Corp, a retailer in which Buffett’s Berkshire Hathaway Inc already owns a stake.
Costco Purchase?
At Berkshire’s virtual shareholder meeting last month, Buffett signaled that the Covid-19 pandemic hasn’t afforded him deal opportunities at bargain-basement prices the way past economic meltdowns have. Despite the nationwide shutdowns that are just starting to lift and a soaring unemployment rate, the S&P 500 Index is only 8% off its February all-time high. That’s partly due to aggressive actions taken by the Federal Reserve to mitigate the crisis, though one can’t deny that there exists an astonishing disconnect between stock prices and the economic realities of many Americans right now.
Costco wouldn’t be a typical crisis-era bet for Buffett in this regard. The shares are up, not down, this year and its operations have carried on throughout the pandemic. Zoom, Netflix, TikTok, Costco — the retailer is right up there with those services that have become centerpieces of the stay-at-home recession.
But in so many other ways a Costco deal would still be classic Buffett. For starters, Buffett already likes Costco. Berkshire has owned the stock for two decades; its 1% stake is valued at about $1.3 billion currently. Buffett’s business partner Charlie Munger, the 96-year-old vice chairman of Berkshire Hathaway, also sits on Costco’s board. Last year, Buffett even publicly marveled at Costco’s in-house Kirkland brand, which at that point had $39 billion of annual sales. “Here’s somebody like Costco, establishes a brand called Kirkland and it’s doing $39 billion — more than virtually any food company,” including Kraft Heinz Co, he said. Berkshire is Kraft Heinz’s largest shareholder.
Costco has proven during this crisis that it has a durable brand and a wide competitive moat, two of the key attributes Buffett looks for. More than 90% of Costco’s US club members renew, and globally the rate is nearly as high at 88%. Those warehouse memberships are a predictable source of cash flow, almost akin to Berkshire’s insurance float that Buffett uses to invest.
While the majority of Costco’s 787 warehouse clubs are in the US and Canada, it does have locations in Mexico, the UK, Japan, South Korea, Taiwan and Australia. It’s also expanding in China, offering Buffett exposure to the country’s growing middle class.
Costco’s same-store sales have risen 6.5% on average for the last 10 quarters, topping other US mass retailers including Walmart Inc, the parent of Sam’s Club. Costco also generated more than $1,300 of sales per square foot in fiscal 2019 — more than any of its peers.

—Bloomberg