Costco Aims to Fuel Sales Growth with Discount Gas

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CostcoCostco (COST) will soon start selling gasoline at its Lincoln Park location in Chicago -- just the latest among many of its warehouse stores to add gas pumps. As Costco looks for new ways to compete with warehouse club operators including BJ's Wholesale Club (BJ) and Sam's Club (WMT) in addition to large retailers like Walmart, Best Buy (BBY) and Target (TGT), Costco can gain new members and drive higher traffic to its stores by expanding its fuel sales.

We currently maintain a $67.36 price estimate for Costco's stock, around 25% higher than the current market price.

High Gasoline Prices Present an Opportunity

We believe that selling cheaper gas is a great way to bring in new members who will eventually spend in the stores. Since people can't buy Costco gas without a membership, and given that gas prices currently range from $3.75 to more than $4.40, drivers are very price sensitive and motivated to sign up.

To bring in customers, Costco typically prices gasoline at 6 cents to 12 cents below the market price. We believe Costco's move to sell more gas at very low margins could drive membership growth and lead to an increase in incremental sales at Costco stores. Costco operates on a warehouse club model under which it charges an annual membership fee to customers and, in turn, offers deep discounts on selected merchandise. Members pay annual fees of $50 to $100 to shop in its stores.

See our full analysis for Costco stock here

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