Costco (COST) always plans for a rainy day. While the warehouse club steadily expands and returns capital to shareholders via dividends (and occasional special dividends), it guards and uses its cash balance carefully.
Unlike Amazon (AMZN) and Walmart (WMT), Costco has not built out a massive two-day, next-day, and same-day delivery infrastructure. Instead, it has focused on partnerships -- like its deal with Instacart -- focused delivery options, and a targeted digital approach.
Costco focuses on delivering value for its members while also being mindful of stockholders. The company has been laser-focused on keeping prices low and making sure members want to renew. That has helped the company during the pandemic and through the current period of inflation/rising consumer prices due to supply-chain issues.
Members know that the warehouse club offers low prices and good values. That's comforting during a period when it feels like everything at the grocery store has gotten more expensive.
It's a challenging time for all retailers, but Costco has managed it well. The chain is also sitting on about twice the cash balance it normally does -- something Truist (TFC) securities analyst Scott Ciccarelli pointed out during Costco's second-quarter earnings call.
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What Will Costco Do With Its Cash?
Costco Chief Financial Officer Richard Galanti follows the same script for every earnings call. He does not offer much beyond sharing the core numbers, but he does respond to questions, although he's very right with his words. He did acknowledge the company's cash position, in response to Ciccarelli's question.
"At some point, we'll figure out what to do. And mind you, our Q2 balance sheet -- Q2 end balance sheet is probably our -- the highest point from a seasonal standpoint because of -- you've built a lot of sales and you still have some of the bills to pay from the Christmas time, not a lot but some. And frankly, knock on wood, our operating cash flow has certainly exceeded what we had expected two years ago. So yes, there is a little more," he said,
Galanti followed by saying something that shareholders will be very excited to hear.
"At some point, certainly, one of the arrows in our quiver is a special dividend along with the regular dividend increase that we've done every year, as well as some stock buybacks," the CFO said.
Costco has not hesitated to pay special dividends. In fact, the warehouse club has paid a special dividend four times over the past decade or so. The most recent: a $10-a-share payout made in December 2020.
"We've done four specials. And as one of the board members said, we are a little quirky and it seems to have worked for us. So it's certainly an arrow in our quiver, but we haven't made any decision at this point," he said.
Costco has roughly $12.3 billion in cash and short-term investments on hand and $2.2 billion in receivables.
Costco Does Not Follow What Amazon Does
Galanti mentioned that Amazon's (AMZN) increase in the price for Prime will not affect Costco's decision whether to raise membership prices.
"And sometime between summer and six or nine months down the road, is [a membership price increase] likely? It's possible, but we'll have to wait and see," he said.
"But we don't really consider what Amazon or what -- we were asked the question the other way with some of our direct warehouse club competitors that theirs is -- they have not changed theirs in a number of years."
The CFO made clear that Costco considers its members first, and while it's aware of outside factors (like what competitors do), that's not what drives the company's decisions.
"We look at what we're doing, how it affects our members. And we look at ourselves in the mirrors. Have we improved the value of the membership? And we've always felt that we've done that in a more dramatic fashion in these increases," he added.
