3 Reasons Costco Wholesale Corporation Stock Could Rise

By Markets Fool.com

Costco (NASDAQ: COST) has gotten through its credit card crisis without major damage.

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Even though the early days of the warehouse chain switching from its longtime provider American Express (NYSE: AXP) to Visa (NYSE: V) produced a massive number of customer service calls to CitiGroup (NYSE: C), the bank providing the cards, the company got back to normal shockingly quickly. It was a dicey period -- one where customer tempers could have flared and long-term damage might have been done -- but Costco managed its way through the challenge.

Now the membership-based chain has put the year-plus transition in the rearview mirror. That allows it to shift focus from simply not losing members to adding new ones. Costco should have a strong year, and there are three major reasons its stock price should rise.

New credit card signups

In the seven or so months leading up to the credit card switch to Visa, Costco stopped taking new signups for its American Express card. That meant there was a period when some people who might have joined the rewards program and increased their spending at the retailer were not able to. Without access to the rewards card -- which gives cash back for purchases in Costco, among other benefits -- those customers may have elected to shop elsewhere.

"Since the previous Costco card had not been offered since November 2015, what we are seeing is tremendous pent-up demand," Citigroup spokesperson Jennifer Bombardier told the Motley Fool via an email interview.

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"Consumer interest and engagement with this card has been extraordinary," Bombardier wrote. "On Day One, approximately 60,000 applications were processed -- more than triple any one day in Costco's 17-year history with Amex. Since then, there have been over 550,000 total applications to date, and we don't anticipate the demand to diminish anytime soon."

Those are potentially very lucrative customers for Costco, as the cash-back offer on the new Visa gives customers an incentive to shop at the chain's warehouses.

The economy remains in doubt

While the economy has improved, many Americans seem less than confident that it has taken a long-term turn for the better. That has been very evident in the current presidential election, where the Republican nominee has tapped into a group of citizens who clearly feel they have been let down by the American dream. The same could be said of people who supported Bernie Sanders'unsuccessful run for the Democratic nomination -- albeit for very different reasons.

But no matter which side of the aisle you fall on, it's clear that much of the country lacks confidence in the continued strength of the economy. That could drive business to Costco, because the chain has positioned itself as a low-priced alternative to traditional stores.

Economic insecurity -- a theme both Donald Trump and Hillary Clinton will be emphasizing to their supporters in different ways -- could drive both Republicans and Democrats to the warehouse club.

Maybe it's time to do digital

Costco's website offers untapped sales potential. Image source: Costco.

Costco has a website, but digital sales have not been a focus for the company. CFO Richard A. Galanti noted in an earnings call earlier this year that this may soon change. During the call he pointed out that Costco's leadership team thinks a lot about what can get the company that extra 0.5- or 1-percentage-point growth, and that "a lot of it centers around dot-com."

"We try to not avoid it or be arrogant about it, but also recognize we try not to freak out about it. ... I really feel pretty good fundamentally about our company and what we've got going on. ... And things could change, but we're -- we'll keep trying to do a few things on the Internet more, but we're going to take it steady," he said.

That's not a strategy or even a promise of making a major change, but it's a sign that Costco at least knows that while it has mastered the in-store experience for warehouse-club shopping, it still has some work to do online. Digital sales represent a mostly untapped new frontier for the brand, which could add sales from customers who like the prices, but don't want to put in the effort to visit a store.

Digital is absolutely a tightrope for the company to walk, because a big piece of its sales come from people "treasure hunting" in its stores and buying things they did not specifically go in for. It's possible, though, to duplicate that experience online -- and should Costco figure that out, it could push sales (and its stock price) higher.

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Daniel Kline has no position in any stocks mentioned. His son is currently battling "zombies" at NERF camp. The Motley Fool owns shares of and recommends Costco Wholesale and Visa. The Motley Fool recommends American Express.

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