HawaiiWritten by Havre On 06 January 2012
Costco is popular among investors, employees and Hawaii customers

Hawaii’s popular big-box retailer, Costco, saw its CEO and co-founder named CEO of the year for 2011 by Morningstar, the Chicago-based investment research firm. Jim Sinegal, Costco’s retiring CEO, is praised for guiding the company through some tough economic times and intense competition while maintaining one of the best workforce environments.

Some of the highlights of Morningstar’s announcement were that Sinegal has maintained health insurance coverage for more than 90 percent of its employees and pays average wages close to $20 per hour (40 percent more than Sam’s Club). This results in the lowest employee turnover rate in retailing, at one-fifth the rate of Walmart. The reimbursement to Costco is a highly productive workforce generating sales per employee of more then $530,000 and at over $1,000 per square foot.

Sinegal also looks out for the customer, constantly changing inventory based on consumer demand. They are able to do this by maintaining only 3,800 SKUs (stock keeping units) per store, compared to other mass merchant superstores at 60,000 SKUs. The proof of customer satisfaction is that Costco was able to raise membership fees last year by 10 percent while maintaining strong retention rates. It was once thought that it would have to do away with the membership fee model, and we all saw what happened when Netflix raised fees.

Looking at Costco (COST, NASDAQ, 52 week range 69.54 – 88.68) as a stock investment, it has done very well this year with its share price up about 19 percent (compared to the virtually flat S&P 500), a 14 percent return on invested capital and over $1 billion returned to shareholders through share repurchases and dividends.

Its balance sheet shows about $5.9 billion in cash and debt under $2.3 billion, with operating cash flow over the last 12 months of approximately $3.14 billion. There are over 20 investment analysts following the company and they are expecting earnings to grow at about a 15 percent annual rate in 2012 and 2013. The company has 592 stores worldwide, including 429 in the U.S., four of which are on Oahu and one each on the Big Island, Maui and Kauai.

I am personally not a Costco member, but my daughter is, because it is just my wife and I in our home. I do go to Home Depot in Iwilei and I see Costco’s parking lot is always full with long lines at its gas pumps. (According to a 2007 Seattle Times article, it is the busiest Costco in the world.) The company is obviously doing something right, especially in Hawaii.

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Havre

Randy Havre has a wealth of experience in the financial industry. In 1987, he established his own full-service stock brokerage firm, which was also registered with the SEC as an Investment Advisory Firm, managing money for the State of Hawaii’s pension fund, among other portfolios. In 1994, he started his first of three Hawaii based Venture Capital Funds. Additionally, he wrote a weekly stock column in the Pacific Business News for 21 years, taught Finance 315 Portfolio Management and Investment Strategies at the University of Hawaii for five years and is on KHON’s Morning News as a business/financial analysis twice weekly. Over the past nine years, Havre has been active in South America doing business development work for some of his portfolio companies, mentoring entrepreneurs and advising investors.

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