) is the largest warehouse retailer in the U.S. with over 530
stores in North America and around 100 stores in international
markets such as Mexico, the U.K., Japan, Taiwan, Korea and
Australia. In terms of store count, Mexico is the third most
important market for the company with 33 stores operational at the
end of September 2013. Costco started its operations in Mexico
through a 50% owned joint venture, and its store count had been
stagnant for the past four-five years. However, the warehouse
retailer acquired the remaining 50% stake from its partner last
year and has opened one store since. Costco plans to add another
store in the current quarter and we expect it to continue expanding
in Mexico in the future. The retailer has seen robust comparable
store sales growth in its Mexican operations and the region's
retail market holds tremendous potential.
Mexico is the second largest economy in Latin America and the
11th most populous country in the world. Over the past few years,
Mexico has seen strong growth in its retail industry with stable
economic environment, controlled inflation and increase in credit
facilities. The market potential is clearly visible from the fact
that the retail giant Wal-Mart (
) operates close to 2,500 stores in the region. Although the
economic growth has suffered in the recent past, lower interest
rates and diluted tax reform should have a positive impact on
consumer confidence going forward. Even the prevailing economic
weakness bodes well for Costco's growth since the retailer provides
its customers with a valuable cost saving shopping option.
Our price estimate for Costco stands at around
, implying a premium of about 5% to the market price.
See our complete analysis for Costco
Mexican Retail Market Holds Good Potential
Historically, Mexico's retail industry has remained strong as
the region has sustained its economic growth and kept inflation
under control. What's promising is that the retail market growth
exceeded the country's GDP growth last year.
Financing and consumer credits have emerged as important
retailing tools in Mexico. Several retailers are evolving into
financing bodies by providing the options of deferred payments at a
"Meses sin intereses"
or monthly payments with no interest has become a common practice
in the market. Moreover, as the competition is rising and consumer
demands are increasing, a number of department stores and grocery
retailers are expanding their product portfolio. Since Costco
already offers a wide variety of products, it is likely to benefit
from this trend.
The retailers are also looking to expand throughout the
country while specifically targeting the regions with heavy
footfall, which has bolstered the popularity of smaller format and
quick-stop stores. This might prove to be a roadblock for Costco's
expansion since its stores are usually large in size (140 k).
However, Costco relies less on the convenient location of its store
(unlike Wal-Mart Express and Target's (
) CityTarget stores) and more on its business model to attract
customers. Moreover, with rising competition a number of Mexican
retailers are switch to Internet retailing. In response to this
trend, Costco plans to launch an exclusive e-commerce website for
Mexico this fall.
Current State Of Mexican Economy Might Favor Costco's
Although Mexico's retail sales have grown in the last few years,
they declined unexpectedly during the initial period of 2013. This
is attributable to weak consumer confidence and a slowdown in the
overall economy. Mexico's economy shrank by 0.74% in the second
quarter due to lower government spending, weak demand for exports
and sluggish consumption. This marked the first decline in the
country's economy in the last four years.
Mexico's strong ties with the U.S. economy seem to be preventing
it from enjoying strong economic growth that its emerging market
peers such as Brazil have. Due to weakness in the economy, the
largest retailer in the region Walmex (Wal-Mart Mexico) witnessed
sales declines in consecutive months of July and August. Comparable
store sales for other Mexican retailers also fell by 2.3% in July.
However, policy makers are likely to cut the interest rates in
order to stabilize the economic growth. Also, the Mexican
government did not include sales tax on essential items such as
food and medicine in the latest tax reforms. This should positively
impact the consumer spending on groceries, which will assist
Costco's growth since it earns more than 50% of its revenues from
this category. Even the weak economic environment bodes well for
Costco's growth as it serves as a viable shopping destination for
buyers looking to save money. This is evident from the fact that
Costco's sales have remained resilient in the U.S. despite the
retail market slump arising from cautious consumer spending.
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