Craig Jelinek Costco CEO Analysis

Costco’s CEO Analysis

The first Costco (COST) warehouse opened in Seattle, Washington in 1983 in a converted airplane hangar. That humble beginning has since blossomed into an industry powerhouse that now enjoys more than $150 billion of annual revenue and a $99 billion market capitalization. The company operates more than 700 warehouses that employ 243,000 people worldwide.

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Costco generates virtually all of its earnings from its membership model, choosing to offer its products and services at very low prices, and the system works; Costco is nearing 100 million total cardholders and has a 90% membership renewal rate. Shareholders have been handsomely rewarded for Costco’s success over the years as the stock has roughly doubled the substantial gains of the S&P 500 since Costco went public.

Craig Jelinek’s Costco Journey

The man leading this enormous empire of warehouses is W. Craig Jelinek, who you can see pictured below.

Jelinek became the CEO of Costco on January 1, 2012, but he has had a very long and successful career with the company before taking the chief executive role.

The 65-year old executive first joined Costco in 1984 as a warehouse manager and spent 20 years in various store and regional management positions. This foundation of operations and interacting with customers has helped Jelinek navigate a highly competitive retail environment, including threats from online competitors, with an eye for what customers want and need from Costco. Jelinek intimately understands Costco’s somewhat unusual business model and how to best make it work in a changing retail environment.

According to the company’s most recent proxy statement, Jelinek was Executive Vice President in charge of Merchandising beginning in 2004, again with a focus on store operations and how to get the company’s assortment to resonate with customers.

He was then promoted to President and Chief Operating Officer in February of 2010 and served in that role for just under two years before being promoted to the top spot in January of 2012.

Jelinek’s knowledge of operations and merchandising are central to Costco’s continued success and he has big shoes to fill; he took over as CEO from the company’s co-founder, Jim Senegal, who held the top spot for nearly 30 years. Jelinek continues to exude the principles of the founder in his belief in putting employees first and keeping prices as low as possible. Jelinek, in addition to his role as CEO, is on the Board of Directors at Costco.

Costco’s Performance Under Jelinek

Costco shares have performed very well under the leadership of Jelinek as the company has continued to focus on the principles that have made it successful in the past 35 years.

Since January 1, 2012, shares of Costco have gained 175% compared to a 101% gain for the S&P 500 during the same period. Shares traded for $82 on the day Jelinek took over as CEO and today, are worth $226, an impressive feat.

Compared to the rest of retail, as measured by the ETF XRT, Costco’s performance is nothing short of staggering. In the same time frame that Costco has risen 175%, the XRT has risen just 57%, less than one-third of the gain of Costco. While Jelinek hasn’t necessarily radically changed the way Costco operates, what he is doing is clearly working as evidenced by the outstanding performance of the stock in recent years. Indeed, given how well Costco has performed in recent years, it would seem the company should just keep doing what it is doing today.

Craig Jelinek’s Compensation

The man at the helm of this sprawling empire of discount warehouses has been paid nicely for his efforts over the years, but certainly in line with industry peers.

Craig Jelinek Costco CEO Analysis

Source: Annual proxy statement

This table from the company’s most recent proxy statement shows Jelinek’s compensation for the past three years as CEO. Costco indexes its executive compensation to similarly-sized retailers including Wal-Mart Stores (WMT), Inc., The Home Depot, Inc. (HD), Target Corporation (TGT), The Kroger Company (KR), and Lowe’s Companies (LOW).

With this in mind, Jelinek’s salary has moved up very slightly as he received a fractional raise in 2016 and an increase of less than 2% in 2017. His cash bonus, which Costco has subjected to caps for its most senior executives, was $192,800 last year, or about one-quarter of his salary. The company believes its executives should be leveraged to the performance of the stock and thus, the vast majority of Jelinek’s compensation is in stock awards. That number totaled $5.5 million in 2017 and similar amounts in the prior two years. This makes up about 83% of his total compensation with relatively smaller amounts in pension contributions and other compensation, in addition to his cash compensation.

Given Jelinek’s long career as an executive at Costco, he owns a significant amount of stock. As of the last proxy statement, his beneficial ownership was stated at 312,687 shares, not all of which are vested. That amount of stock is worth more than $70 million at today’s share price, meaning that the vast majority of Jelinek’s personal net worth is tied to the fortunes of Costco and its shareholders. As Jelinek has been CEO for several years and is already on the Board of Directors, we do not expect significant movement in his total compensation in the years to come.

Final Thoughts

Craig Jelinek has had a very long and successful career at Costco. After seven years leading one of the world’s largest retailers, Jelinek has built a stellar reputation in the business world.

He continues to focus on the company’s employees and in shedding every possible penny from operating costs in order to offer merchandise to consumers at the lowest prices. Given the way the company’s membership count continues to grow, these efforts are obviously paying off.

With Jelinek’s age at 65, it is possible he may not be the CEO for many more years. However, whenever he does decide to leave, he will have left Costco in a better spot than when he took over.

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Article by Josh Arnold, Sure Dividend

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