This Retailer Could Set Itself Up for a Big Jump in Revenues

Retail is typically a tough business. A retailer buys up goods that someone else has produced, and has to sell them at a profit. Competition keeps prices from moving too far higher from other sellers. And the costs to operate stores can be substantial.

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  • That kind of business model has made for great long-term returns in some of the biggest retailers. They’re able to get the lowest prices thanks to the volume of goods that they sell.

    But some retailers can do even better with a tweak to the model. By becoming a membership club and charging an entrance fee, they can earn revenue outside of sales.

    That’s the business model of Costco (COST), which may be on track to increase its membership costs this year. That’s helped shares hover near all-time highs.

    Costco is also famous for only selling goods at no more than a 15 percent markup from what they pay. That ultra-low prices keeps customers coming back to buy in bulk.

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  • Action to take: Investors may find shares pricey at 49 times forward earnings. But Costco has done a fantastic job of continued growth.

    And in addition to the 0.5 percent dividend, the company often declares special dividends. That makes shares a long-term buy for investors, especially for those who add to their position during bear markets. The company’s latest drop after earnings makes for a reasonable starting point to buy.

    For traders, the June $865 calls, last trading for about $16.60, could see mid-double-digit returns in the coming months on a further trend higher for shares from here.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.

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