David Rosenthal: belief

Transcript context

…I know. Costco has been blowing up on TikTok as we've talked about. But also, from all available data, young people are getting memberships at the same rate they always have. Of course, the bulk of members will be people in their 40s and 50s with a family and a house, but that hasn't really changed over time. If you liked the Costco business in the last decade as an investor, all signs are it's going to be pretty similar in the next decade, too, in terms of the ramp of when people become members. There's another one that's like, I'll put it in a bear case, but again, I'm not really sure it's a bear case. It is worth pointing out. It is either true that this business cannot grow at more than 10% per year on average. They've had little years where they've spiked but on average, or management just doesn't want it to, which also would be fine because there are lots of benefits to slow, steady, durable. But the company has a lot of cash on the balance sheet and regularly does dividends and buybacks. There's this crazy stat from The Science of Hitting that the company has returned 80% of net income to shareholders in the last decade rather than reinvesting it in growth. The key reason for this is that it's just really, really hard to expand. They need to hire the right people, train them well, promote internally, and the work to scale is so physical. The new construction, expanding suppliers, shipping large pallets into new geographies. Cash is not the constraint stopping them from expanding. There is a physical limit to the speed at which this company can grow. I'm calling that a bear case because it's more like, you should be aware that this thing can't scale like Zoom scaled during the pandemic. That's the polar opposite of the spectrum. Zoom, Slack, or any of these has basically no bottlenecks to infinite instant growth, or Instagram launching threads, instantly has 100 million members. Costco is the literal opposite. There are bottlenecks everywhere to scaling, and no amount of cash is going to solve that problem. Got any bear cases? I think I'm going to quote Charlie on this one and say, I have nothing more to add. I thought you might go there. All right, bull case. The biggest one is the flywheel is spinning, and I'm not really sure who can catch them. Here's, again, from The Science of Hitting substack. "The average Sam's Club only generates about half the revenues of a Costco, and that gap has widened over time." Given the unit economics of the business, that's a tough hurdle to overcome, which explains why Sam's Club has a smaller unit base today than it did a decade ago. Crazy, right? Over the same period, Costco increased its US warehouse count by 1/3. Anyone who could have challenged them is just done.…

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