Does Your Stock Follow Costco's Example?

Think the best retailers pay their employees peanuts in order to operate at the leanest level possible? Think again. As reported in The New Yorker, a Harvard Business Review study finds that profit margins and sales can be improved the more a retailer spends on its employees.

The numbers
Looking at data from the now-bankrupt Borders, the study found that an increase in labor levels increased profit margins by 10%. Additionally, another study quoted "shows that for every $1 increase in payroll, a store could see a $4 to $28 increase in monthly sales." However, this doesn't mean a retailer should constantly hire employees. After a certain number of employees, profitability declines with every new employee. But, it shows that the usual thinking of profit maximization through slender labor costs may not be the best model to follow.

Warehouse clubs
Taking Costco (NAS: COST) and its competitor Wal-Mart's (NYS: WMT) Sam's Club as examples, the study notes that sales per employee at Costco were double its competitor. Also, whereas Costco sold $986 per square foot, Sam's Club only sold $588. Why does Costco perform so much better? The study points to Costco employees earning about 40% more than Sam's Club employees, which leads to less employee turnover and better customer service.

Employee satisfaction
High employee satisfaction doesn't mean that a company spends the perfect, profit-maximizing amount on employees, but it does represent companies that can depend on their employees to perform the best.

Of course, Costco was one of the highest-rated retailers to work for, according to employee reviews from But who joined it? Of the top ten, only two other publicly traded companies: Nordstrom (NYS: JWN) and The Buckle (NYS: BKE) .

The Buckle's revenue per employee is an astounding $462,000, with a net income per employee of $65,850. Nordstrom compares with $192,000 in revenue per employee and $12,000 in net income per employee.

Spend, and cut, wisely
This study suggests that the top retailers won't be the ones who have cut expenses and cut corners on labor. And the ones who do take the time to train and support their employees will prosper, even in this era of online shopping.

Of course, this isn't a foolproof way to hunt for top retailers. There are exceptions, like web giant (NAS: AMZN) . The company has extremely high revenue per employee, but it has also been slammed for poor work environments. Instead, you should consider this an additional tool in your investor toolbox. Those retailers that invest in their own are far more likely to create a better experience for shoppers and investors alike.

If you missed the great returns from owning Costco's stock, there is a company emulating its moves in an emerging market. Not to mention, it is The Motley Fool's top stock pick for 2012. To reveal which stock, check out the free report -- just click here!

At the time this article was published Fool contributor Dan Newman goes into a Zen-like state of consumerism when entering Costco. He holds no shares of the companies mentioned above. Follow him @TMFHelloNewman.The Motley Fool owns shares of Wal-Mart Stores and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores and Costco Wholesale. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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