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Nicole Benjamin: Hey, everybody. It’s Nicole Benjamin, your host here at Seeking Alpha to bring to you another episode of our series Portfolio Pulse, where, as the name suggests, we’re going to be keeping a pulse to all the big financial moves happening in the market. Now, for today’s episode, I’m joined by none other than Jack Bowman. Jack, thank you so much for joining us today.
Jack Bowman: Yeah, thanks for having me on, Nicole.
NB: Absolutely. So, Jack, I want to talk to you. You’ve been on Seeking Alpha since 2023. Tell us about what your background is in the financial space. What got you interested? Anything regarding your investment philosophy.
JB: Yeah. So, I used to be – I was classically trained as a teacher. I taught economics in high school for a lot of years. And then in 2021, I got my financial adviser’s license and I started doing investment advice. And I realized through that work that I really liked the communication aspect. I love sending my thoughts out to clients. I love writing those little quarterly letters. And at some point I was like, I want to do more than quarterly, but a lot of my clients are like, I don’t want to hear from you more than that, right?
So, where else can I start talking to people? And I could start publishing my ideas and my thoughts on Seeking Alpha. And this got a fair bit of traction. I’m up to almost, it’s like 9,000 followers now and I’m very happy with that and very pleased with the reaction I’ve gotten from readers. But I’ve become known as this macro idea guy that a lot of times I’m talking about the Fed. I’m talking about inflation and GDP. And every now and then, I get into some of the stock picking that I do. And this is where I sometimes get big hits and sometimes I swing and miss.
And this is one of the things that I think is important for investors to remember is that, when I’m talking about stocks, it’s a portion of my portfolio. It’s about 15% of my total assets are going into the stock picking. And among those lives Costco as one of my larger positions and has been for a long time. I’ve been an investor in Costco for maybe a decade now.
NB: Well, I love that. Considering your most recent article on Costco, piggybacking off of it being one of the stocks you love in your portfolio, I want to talk to you there. So, you recently said that Costco is the primary beneficiary of the vibecession where consumers are feeling stretched pretty thin with inflation. They want their dollar to go further. So, I guess from your research, what you’ve seen, what is the specific evidence in the membership data or even in the Kirkland sales that proves that these shoppers are really moving or shifting to Costco rather than just getting in on these deals temporarily?
JB: Yeah. So, I want to first shout out to Kyla Scanlon, she coined the term vibecession. And I think it very accurately describes this picture where we’ll look at, oh, inflation’s down to 2.5%. And you ask any consumer at the grocery store and it hurts. And they’re like, it’s way above that. That’s a lie, right? They don’t believe in the headline numbers because it doesn’t feel like it. Costco offers this reprieve, and one of the things I want to caution people about is, not everything at Costco is actually low margin cheap, but there’s enough things and very specific things, right, they’re very famous for the hot dogs and the rotisserie chickens that they make losses on, right?
They lose a $1.50 every time they sell a chicken, but it gives people this sense of, I can make my money go further at Costco. And we’ve seen this that post-2022, that membership rate of growth has been much higher than it was prior to that. And the only real difference other than the digital explosion with the pandemic, but was inflation, was that every year as people feel more stretched and stretched because this inflation has been dragging out, we’re still above target 50 some weeks later, right, after the Fed said, we’ll be below target within the next year, and now we’re still above that a year later.
And, if you want respite from that, you go to Costco. It’s not always bad for Costco. And we see this in things like Kirkland Signature where they’re able to sell generics, at a rate much higher than other firms are selling like, I say generics, so, white label products, right? Kroger has their private label, and I forget the Sam’s Club one, but they’ve got their own in-house. And Costco’s is the next level in terms of goodwill.
NB: So, I want to go back. You said low margin, right? And it’s not always that, but in this regard, how is this not a financial risk for them, in comparison to their other competitors?
JB: Yeah. So, low margin is a risk because – and this is especially true with the gas prices right now, right? The conflict in Iran, and I won’t get into that, but the conflict in Iran has driven up gas prices significantly. They’re up 11% since the conflict started a couple of days ago. We’re on day seven now. And that’s a huge jump. So, people start to flood to where gas is cheaper, Costco. But Costco is one of the places that almost loses money on gas. They make a little bit. Their margins are really, really thin.
And so, on the news of people going to Costco for gas in their earnings call, the stock dropped a little bit. People were saying, oh, if people are going to Costco for gas, they don’t always go in the store. Different from the chickens and hot dogs and all of that stuff. So, this was a risk of people going to Costco, getting their cheapest, lowest margin item and leaving. And the more that increases because it’s only about 50% of gas shoppers go in the store.
The more that increases, the worse it is for Costco. So, in this way, there are certain things that can trigger pain for Costco in this way of low margin. Gas is one of those things. Most of their food items are not, they are very low margin, but they’re not a risk because they’re still usually almost the same or lower margin than grocery stores. And so, they tend to compete on that, and customers tend to know that too.
NB: Now, I also want to look into the February 20th Supreme Court ruling against the IEEPA tariffs. So, I guess realistically, what timeline and impact of a potential half a billion to $2 billion refund on Costco’s future earnings? What do you see happening there?
JB: Quite frankly, I thought the Supreme Court was going to rule against Costco here. I thought they were going to keep the tariffs as it was. And it seems that so far, they’ve only ruled against the IEEPA tariffs, which President Trump immediately said, okay, now, I’m just putting a 15% global rate on, we’ll cover the difference. And Treasury Secretary Bessent even said that he thinks they’re going to rake in more money with the new tariff rate. I don’t know how true that is or not, but that’s what they’re saying.
So, Costco stands if they get a refund because the tariffs were struck down, but the court said nothing about refunds. In fact, they even made a line in there that said the lower courts can figure that out. And so, they passed the buck a little bit on that, but in that process, now Costco’s in limbo. They could get a half a billion to $2 billion refund. We really aren’t sure how much tariffs they’ve paid, because they pay different rates on different items. Some of them are from Mexico and Canada, which didn’t qualify for tariffs because they’re under the USMCA Act, and so there’s all kinds of USMCA trade deal.
It’s really unclear about how much money it actually is to the investor, and then it’s also unclear if we’re ever going to get it. The lower courts, and I still think this is true. I don’t think the lower courts are going to rule on a refund. I think they’re going to rule that Costco gets no refund, and the treasury will keep the money.
NB: Well, now that they’ve had their Q2 earnings call, I want to talk to you about how you’re interpreting the latest membership renewal rates, and even that of their fees, with that in mind, how do you see that potentially offsetting their infrastructure spend?
JB: Yeah, Costco is an interesting beast in this way, because they’ve been delineating between physical memberships and digital memberships. One of the things they saw was, over the pandemic and in the ensuing years, they got a huge digital boost. And then all those people got really flighty a couple of years later. And they’ve been saying in their earnings calls, look, we have a much higher retention rate of people who come into the store. If you go to a Costco, you’re likely to keep going to Costco.
If you only order online, you’re likely not to do that anymore. And that’s becoming more and more true over time. So, their renewal rates are hit or miss, where on one hand, the physical renewal rates are still very good, and we’re actually seeing that still grow.
NB: I also want to ask, to your point, Costco trades at a significant premium valuation. So, I guess at what point does this recession insurance price tag become too expensive, even for a high quality company?
JB: This is a question that I have tried to avoid answering in a lot of my articles on Costco because I don’t quite know how deep the goodwill goes. And this is one of the things that’s hard to make tangible or to make into math, right? Valuations are easy because it’s a math equation, and I can just compare them across competitors and across history, right? Is this historically overvalued, undervalued? But it’s hard to measure how much people like a company or how much they’re willing to be loyal to a company. And this is one of the things that I think is the reason Costco is priced so highly is because there’s this feeling that their growth has a certain floor to it that’s higher than most other retailers because of that goodwill.
NB: With that in mind, you gave it a Buy rating. Is there anything that they could do that would make it a Strong Buy for you?
JB: If the earnings rate increased significantly and we took down that multiple to 30 or even 25, which I doubt will happen in the immediate future, but if it did, that’s easily a Strong Buy for Costco.
NB: Alright. Well, we’ll leave it there. Thank you so much, Jack, for joining us today. And for everybody that’s listening in, go ahead, click the follow button on Jack’s page, see if Costco might be right for your portfolio, and we’ll catch you here on another episode next time.
Follow Jack Bowman on Seeking Alpha!
Read Jack Bowman’s Article on Seeking Alpha!
