Costco's Secret Is in Plain Sight, So Why Hasn't Anyone Copied It?

NEW YORK (TheStreet) -- Costco's (COST) secret is that it continues to profit even though it pays wages that satisfy its employees.

More proof came in the latest Glassdoor survey. Its list of the 25 best companies based on compensation listed Google (GOOG) at No. 1 and Facebook (FB) at No. 3. Costco was No. 2 and was the only retailer on the list.

That doesn't mean Costco pays as much as Google. The results are based on surveys of employees. It means Costco employees are nearly as satisfied with their treatment as those at Google.

Employees may be happy today, but investors are not.

On Wednesday Costco reported earnings of $473 million, or $1.07 per share, on revenue of $25.23 billion, missing analyst estimates for EPS of $1.09 and revenue of $25.76 billion. Shares were down about 78 cents overnight, and are flat over the last year.

Everyone, including our own Brian Sozzi, asks, "What's Costco's secret?"

The secret comes into focus when you compare Costco's results with its closest competitor, Walmart's (WMT) Sam's Club, which came in a few weeks ago. 

As Walmart management said on its conference call, "Sam's Club had a tough quarter," performing "below expectations," with same-store sales down slightly from a year ago. Sam's represents 26% of Walmart's total volume, meaning it's actually bigger than Costco, thanks in part to a larger international presence. But Sam's international operations are growing -- it's the domestic end of the business that is not.

In its latest quarter, Costco, on the other hand, logged overall same-store sales growth of 4%.

The simple implication from this is that many people are driving right past Sam's Club outlets to go to Costco. I do it all the time. The question Wall Street never asks is why.


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