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When I walk into a business, I often try to guess how much it generates in sales each year. One of my favorite places to do so is Costco (NASDAQ: COST), which offers a peerless volume of products and services from its cavernous warehouses.
The Nation’s Second-Largest Retailer
It’s fair to say that Costco has cracked the nut when it comes to attracting throngs of customers to each of its nearly 700 locations. Using a membership-based retail model, it has matured into the second-largest retailer in the world’s largest economy when measured by annual sales.
But this isn’t enough for the Washington state-based retailer, which is aggressively expanding its store count. Costco has opened 10 new locations so far this fiscal year, and in the fourth quarter alone plans to open an additional 14 in cities including Wichita, Kansas; Mobile, Alabama; and Rochester, New York.
Costco is also laser-focused on increasing sales at its existing locations. “We believe that the most important driver of increasing our profitability is sales growth, particularly comparable sales growth,” the company said in its latest annual report. It accomplishes this by seeking to increase “the shopping frequency from new and existing members and the amount they spend on each visit.”
Sales At An Average Costco
How does all of this translate into sales on a warehouse-by-warehouse basis? As Costco’s chairman and CEO wrote in their most recent letter to shareholders, the average annualized sales of the 30 warehouses opened last year was its highest ever — $108 million per location. Meanwhile, the average annual sales of all warehouses also reached an all-time high in FY 2014 — $164 million per warehouse.
There are a couple things to keep in mind when you think about sales volume at a typical Costco. First, the longer a store has been open, the larger its sales are likely to be. Costco’s 454 locations opened in 2005 and before had average annual sales of $178 million in the most recent fiscal year while warehouses that had been opened in 2014 recorded average annual sales of $108 million in FY 2014.
This positive relationship isn’t perfect, as stores opened in the run-up to the financial crisis are still struggling to catch up to both earlier and later vintages. However, having once managed a retail store, I can attest to the fact that this relationship is valid.
The second thing to keep in mind is that there are outliers. For instance, 165 Costco locations generated annual sales greater than $200 million last year. Of these, 60 warehouses exceeded $250 million in annual sales, and two recorded sales in excess of $400 million. Thus, while the average sales figure is both impressive and revealing in and of itself, it hardly matches the chain’s highest-grossing locations.
In short, Costco’s stores are huge businesses in and of themselves. In fact, it is the only national retailer in the history of the United States that can boast of average annual revenue in excess of $160 million per location.
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John Maxfield has no position in any stocks mentioned.