Shortly after the opening bell, we will be initiating a position in Costco (COST) , buying 75 shares at a bid/ask of $304.80/305.00. Following the trade, COST will represent 0.75% of the portfolio.
We will bring up the grocery wholesaler Costco out of the Bullpen as our recent exit of Kohl's (KSS) has made room for an additional name in the portfolio. Costco's 2019 annual report can be found here. Jim also recently interviewed CEO Craig Jalinek on "Mad Money." You can watch a replay of the interview at the link here.
Markets are expected to open sharply lower Monday morning due to fears of the spread of the coronavirus in China and its impact on business activity around the world. But as club members should know well by now, we've been keeping our cash position at elevated levels throughout the start of 2020 out of caution of overall greed and some type of exogenous event that would sell stocks lower.
When we have the cash on our side like we do today, our first move when we see indiscriminate selling in the broader market is to buy the highest quality stocks. Those are the names you can typically count on to bounce once the selling pressure abates. As we scour our Bullpen list for what to buy in this type of environment, we can't think of a higher quality name than the grocery wholesaler Costco.
One key aspect of the club-based Costco is how it operate in the volume business, not the margin business. As Jalinek said in the interview above, "we have a responsibility to figure out how little we can make off a product, instead of how much we can make off a product." There is an incredible flywheel effect going on here with Costco always looking for ways to lower expenses, become more efficient, and then pass on those savings to its customers through lower prices, which in turn leads to increased volumes. This value proposition of quality merchandise of all ticket sizes (from food to wine to diamonds) at the best possible price creates a treasure-hunting type experience that resonates with every type of consumer around the world. Costco combines this customer experience with an ever-improving club membership program that features unique offers and services, creating an overall brand that has been-and we think will continue to be -- successful in the future.
Speaking of this worldwide concept, we are also quite bullish on Costco's international expansion opportunity, specifically in China. When the company opened its first warehouse in Shanghai back in August 2019, the popularity was so intense that it created a mosh-pit like atmosphere and store had to close early. We are not kidding -- check out the video here. But Costco's success was not limited to just the first day as management said on the December earnings call that this location has "exceeded our expectations" with growing sales and strong sign-ups. In fact, while membership at the average Costco is somewhere in the mid-to-high 60,000s and some locations in Asia get around 100,000 to 120,000 members after a few years, the Shanghai location already has more than twice that, according to management. Now the China rollout is slow with the next location due in about one and a half years, but the warehouse's incredible popularity from its start speaks highly about Costco's overall expansion opportunity. And since this is more of a longer-term opportunity than a near-term driver, we are willing to look past any near-term weakness related fears of the coronavirus.
At about 0.84%, there is not much dividend yield to be had here. However, speculation has been increasing lately about the potential for a special dividend. Having done so in fiscal year 2013 ($7.00 per share), FY 2015 ($5.00 per share), and FY 2017 ($7.00), this capital allocation strategy appears to be management's preferred way of doing things, in addition to their 16 consecutive years of dividend growth. Now Jalinek said during the "Mad Money" interview that there are "no plans right at the moment" for a special dividend, but he acknowledged that he is always mindful of shareholders. Historically speaking, Costco's special dividends have been well-received by investors. The last three times Costco announced a special dividend the shares outperformed the S&P 500 over the declaration date to pay date time frame. That does not mean the same result happen again, but it certainly shows an investor appreciation for this strategy.
And as we talked about in our Bullpen Alert, over the past couple weeks, several retailers have reported their holiday retails sales numbers and there has been a lot of disappointment. Whether it be the continued struggles at Kohl's, the big miss at Target (TGT) , or even the flip to negative comp sales from positive expectations at Five Below (FIVE) , we are continuing to see an evolving consumer landscape characterized by haves and have nots.
But if there is one major retailer that shined during this period (and has also made their numbers available to the public), it is Costco with its impressive total company 7.8% comps increase ex gas and FX (+8.4% in the U.S.) over a 5-week period ended Jan. 5 per the press release here. Numbers this big for a retailer of this size are a testament to the company's overall value proposition of everyday low prices, its loyal customer base, a growing online presence (+42.6% e-commerce comps ex gas and FX in December, with an estimated 20 percentage point positive impact from Thanksgiving/Black Friday/Cyber Monday timing), and its ability to increase market share without suffering from heavy promotional activity/price wars. Said simply, Costco is on the right side of the trends we look for in retail.
We are initiating a position with a $340 price target, representing roughly 38x consensus CY 2020 earnings per share estimates. We know we aren't early here with this stock nearly straight up since the second half of 2017, but COST has spent the last few months in consolidation mode despite the broader market run-up. As analysts at Oppenheimer pointed out when they upgraded COST to Outperform last week, COST was up 3% since late August compared to an S&P 500 gain of 14%. We agree with Oppenheimer's assessment that this underperforming period has made the stock's multiple much more attractive on a relative basis.