As I've posted on the Yahoo message boards, IMHO this company will be hurt because it will not be able to sell the high-ticket items that it makes all its profit on.
This is partly conjecture and partly from experience (I worked my way through college 20 years ago as a grocery store stocker/clerk). In a grocery store, you have several loss leaders that you use to get customers to come into the store. These are things like eggs and milk. Even though you make a gross margin on these items, you lose money on them when you allocate in the relatively consistent fixed costs and operating costs.
In COST's case, it costs about the same to handle a pallet of coffee, speakers, stereos or printers as opposed to toilet paper or soap. My educated guess is that the company makes money on coffee, speakers and stereos and loses money on TP and soap based on the previous explanation of allocating costs. This notion is further solidified by the placement of product in each COST store. The money makers are right in your face as you come through the door or exit toward the cash registers -- both places that you must pass by to buy anything. The losers would tend to be near the back although I would assume that a lot of winners would be placed closely to the losers for visibility.
These days, product placement is accomplished in most retail stores by computer generated models to get the highest return. Walk through COST and see if you can make sense of the above analysis.
If a recession hits, people will still be buying toilet paper and soap at COST, but will they be buying stereos at the same pace? You have to sell one helluvalotta TP to get the same gross profit as a stereo.
This being said, I am long COST and am keeping the suspicious mind that has helped prevent massive losses in the latest stock market debacle.
Good luck all,
Clay |
