Costco Wholesale Corporation
(
COST
) recently entered into an agreement with Controladora Comercial
Mexicana, under which it will acquire the latter's 50% stake in its
Mexican joint venture, Costco de Mexico, for approximately $760.4
million. The deal, which gives full control of the operations, is
said to be judicious on the part of Costco's international
expansion.
Additionally, Costco de Mexico, which is managed by Costco
Wholesale, declared a cash dividend of approximately $340.9
million, to be allocated equally between Costco and Controladora
Comercial Mexicana.
Costco, one of the leading U.S. warehouse club operators, hinted
that it will utilize the amount of dividend along with its existing
cash balances to fund the buyout. On the other hand, Controladora
Comercial Mexicana informed that it will employ the dividend and
sale proceeds in repaying the debt.
The transaction is yet to be approved by the Mexican Federal
Competition Commission and Controladora Comercial Mexicana's
stakeholders. Costco stated that Guillermo Gonzalez Nova, the
chairman and Carlos Gonzalez Zabalegui, the CEO of Controladora
Comercial Mexicana will remain on the board of Costco de Mexico,
while Jaime Gonzalez Solana will continue to serve Costco de Mexico
as CEO.
Costco continues to be a dominant retail wholesaler based on the
breadth and quality of the merchandise it offers. The company's
strategy to sell products at heavily discounted prices has helped
it to remain on a positive growth track amid the beleaguered
economic conditions, as cash-strapped customers continue to see it
as a viable option for low-cost necessities.
A differentiated product range enables Costco to provide an
upscale shopping experience to its members, resulting in market
share gains and higher sales per square foot. Moreover, the company
continues to maintain a healthy membership renewal rate. Costco
also remains committed to open new clubs in domestic and
international markets. The company's diversification strategy is a
natural hedge against risks that may arise in specific markets.
Costco faces stiff competition from
Target Corporation
(
TGT
) and Sam's Club, a division of
Wal-Mart Stores Inc.
(
WMT
), 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 margins.
Moreover, the company's customers are sensitive to macroeconomic
factors including interest rate hikes, increase in fuel and energy
costs, a sluggish housing market, and high unemployment and
household debt levels, which may affect their spending.
Currently, we maintain our long-term Neutral recommendation on
the stock. Moreover, Costco holds a Zacks #3 Rank that translates
into a short-term Hold rating.
COSTCO WHOLE CP (COST): Free Stock Analysis
Report
TARGET CORP (TGT): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
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