We reaffirm our long-term Neutral recommendation on
Costco Wholesale Corporation
) with a target price of $124.00, as risk and reward balances
Why the Reiteration?
Costco continues to be a dominant retail wholesaler based on
the breadth and quality of merchandises it offers. The company's
strategy to sell products at heavily discounted prices has helped
it to maintain positive growth amid the beleaguered economic
conditions as budget-conscious customers continue to see it as a
viable option for low-cost necessities. Having delivered
comparable-store sales growth consistently, Costco is well
positioned in the warehouse club industry.
Costco delivered comparable-store sales growth of 2% in
November, reflecting comparable sales increase of 2% at the U.S.
and 1% at the international locations.
We believe that Costco's differentiated product range enables
it to provide an upscale shopping experience to its members,
resulting in market share gains and higher sales per square foot.
Moreover, it continues to maintain a healthy membership renewal
If we look at Costco's first-quarter fiscal 2014 performance,
earnings came in at 96 cents a share, a penny ahead of the
prior-year quarter earnings. The bottom-line improvement was
buoyed by top-line growth due to a rise in membership fees and
improved sales of discretionary items.
The warehouse retailer's total revenue, which includes net
sales and membership fee, climbed 5.5% to $25,017 million from
the prior-year quarter. The revenue growth has accelerated from
0.8% increase witnessed in fourth-quarter fiscal
However, both the top and bottom lines missed the Zacks
Consensus Estimate of $25,232 million and $1.02 per share,
respectively. This Zacks Rank #4 (Sell) stock has delivered
negative earnings surprises in the last 3 quarters - 5.9% in
first-quarter fiscal 2014, 4.1% in fourth-quarter fiscal 2013 and
1.9% in third-quarter fiscal 2013.
Moreover, Costco faces stiff competition from
) and Sam's Club, a division of
Wal-Mart Stores Inc.
), which follows a similar business model that pushes through
high volumes of merchandise at low prices in membership-only
warehouse clubs. Thus, aggressive pricing to gain market share
and drive traffic amid stiff competition may depress sales and
Going by the pulse of the economy, we believe that
budget-constrained consumers will remain watchful of their
spending and look for discounts. Consequently, we could see more
competitive pricing, compelling products and innovative ways to
Other Stocks Worth Considering
The other better ranked stock worth considering in the retail
) that carries a Zacks Rank #2 (Buy).
COSTCO WHOLE CP (COST): Free Stock Analysis
PRICESMART INC (PSMT): Free Stock Analysis
TARGET CORP (TGT): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
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