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Why Costco investors are smiling

Despite the tense retail environment, the discount chain's shareholders' meeting was a festive affair.

By Mina Kimes, reporter
January 30, 2009: 9:42 AM ET

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(Fortune) -- The retail sector may be in a downward spiral, but the hundreds of investors who attended Costco's annual shareholders meeting in Bellevue, Wash., on Wednesday had other concerns. For example: How long was the line for free croissant sandwiches? And where were people getting slices of pecan pie?

"I can get enough chocolate muffins here to stock up for my Super Bowl party," says Julie Beeler, a longtime shareholder who drove 30 minutes from Des Moines, Wash., to attend the festivities. "I've been to the meetings for Amazon, Starbucks, Microsoft, but Costco has the best ones. I don't have any questions--they're a good company."

Beeler is right to be pleased - and not just with the snacks. Costco (COST, Fortune 500), along with Wal-Mart (WMT, Fortune 500), is one of the few retailers to buck dismal sales trends over the last year. The $71 billion warehouse chain announced in December a 4% jump in quarterly revenues, to $16 billion, and a 1% increase in same-store sales (both metrics were hurt by foreign exchange). Costco's stock dipped 23% last year (compared to a 32% drop in the S&P retail index), but if you bought it five years ago you've still seen 63% returns.

Several of the shareholders at the meeting recognized each other, shaking hands and hugging over packets of free laundry detergent and caramel macadamia nut clusters. Samples were abundant, just as they are at the company's 550 stores. Sally Holzbach, an 83-year-old shareholder who attended the event with her daughter, Sarah, got her picture taken, then printed on a cover layout of Costco Connection magazine.

Beeler pointed out that many of the attendees were retirees. Costco workers had prominently displayed hearing aids and were testing visitors for osteoporosis.

Jeff Brotman, the co-founder and chairman of Costco's board, introduced a new board member, Jeffrey Raikes, a Microsoft veteran and the CEO of the Bill & Melinda Gates Foundation. Brotman also announced, to the shareholders' delight, that the life story of Dr. Ben Carson, a Costco director, was going to be dramatized in an upcoming made-for-TV movie starring Cuba Gooding Jr.

Before CEO and co-founder Jim Sinegal took the stage, he screened a video montage of Costco's appearances in movies (Jim Carrey's Yes Man) and television shows (Conan O'Brien and Jimmy Kimmel are fans). Sinegal rolled through a slide show of new store openings. He pointed out that, in Japan, customers lined up for 1.5 miles at a winter store opening. Korea now has the world's busiest Costco.

One shareholder asked how Costco manages to appeal to customers from different cultures, and Sinegal boasted that the company's baked goods were more popular in Japan than in anywhere else. "The Japanese are going to get fat," whispered an audience member.

While Sinegal had plenty of positive results to report, like an 87% rate of membership renewal, to back his optimistic outlook, his tone was pragmatic. He admitted that the company had fewer days of strong Christmas sales this year than in 2007 (due in part to a massive blizzard in the Northwest), and that more customers were deferring major purchases. While he did say that Costco hopes to expand to 1,000 stores by 2019, he said that the company could cut that outlook if economic conditions continue to be poor.

Still, Sinegal was eager about the opportunity to take market share from bankrupt retailers and grow newer divisions, like Costco's successful private label. He also noted that Costco would sustain its $0.16 dividend (about 1.3%). "Great companies prosper during tough times," he said.

Shareholders asked very few questions about the company's financial position, although one attendee did ask Sinegal why he thought he could sell a $156 shirt in a recession. Most of the queries were about Costco's products - specifically, why certain ones (1% milk, diabetic candies, Apple computers, unsalted butter) were missing from certain shareholders' local stores.

Sinegal patiently explained why the company sells specific products in different stores ("vote at the checkout," he said) and why it gives up on less popular items (such as the $156 shirt). He was briefly flustered when a young audience member asked him what Costco's most popular item was - toilet paper, he said - and Brotman had to interrupt him to point out that the questioner was Sinegal's granddaughter, Chloe.

The only tense moment of the afternoon occurred when an investor asked Sinegal if "the aging company" had a succession plan. The CEO, who recently turned 73, pretended to cringe - he has faced criticism in the past because he did not clarify whom his replacement would be. Yes, he said, Costco has a plan. To top of page


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