Costco Wholesale Corporation
(
COST
) 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 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.
Riding on Positive Comps
The U.S. economy is still grappling with an uneven recovery, and
companies are trying very hard to shield themselves from the
financial turmoil. Amid this uncertain environment, Costco has
almost successfully overcome the hurdles, keeping an upbeat note
and sustaining momentum. The company, which exited 2011 strongly by
registering an average comparable-store sales growth of
approximately 10.6%, is all set to repeat the same performance in
2012 as evident from its comps data so far in the year.
From January to August, 2012, Costco has consistently registered
comparable-store sales growth. In that period, comps growth touched
a low of 3% and hit a high of 8%, thereby recording an average
growth of approximately 5.5%.
In the first eight months of 2012, comps increased 8% in both
January and February, 6% in March, 4% in both April and May, 3% in
June, 5% in July and 6% in August.
The Company Counts Upon
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 opening new clubs in domestic and
international markets. The company's diversification strategy is a
natural hedge against risks that may arise in specific markets.
Impressive Results
Consumers seeking discounts started flocking to warehouse clubs,
leading to improved sales of discretionary items. Consequently,
Costco witnessed high-single digit growth in the top line during
the third quarter of 2012, which subsequently led to an increase in
the bottom line.
Costco's third quarter earnings of 88 cents a share beat the
Zacks Consensus Estimate by a penny, and surged 20.5% from 73 cents
earned in the prior-year period. In the second quarter of 2012, the
company's bottom line had augmented by 13.9%.
After registering a growth of 10% in the second quarter, the
warehouse retailer's total revenue, which includes net sales and
membership fee, climbed 8.2% to $22,324 million from the prior-year
quarter, and handily beat the Zacks Consensus Estimate of $22,072
million. Net sales jumped 8.2% to $21,849 million, whereas
membership fee rose 9.2% to $475 million.
Costco's comparable-store sales for the quarter rose 5%,
reflecting a comparable sales increase of 5% both at its U.S.
locations and international divisions. The results were favorably
impacted by rising gasoline prices but adversely affected by
foreign currencies fluctuation.
Excluding the effects of gasoline prices and foreign currencies,
Costco's comparable-store sales rose 5%, with U.S. comparable sales
up 4%, while international comparable sales were up 8%.
Tough Economy and Stiff Competition
The economy is still not out of the woods, and whether 2012 will
mark a complete turnaround is difficult to predict unless some
concrete steps are taken. Cuts are deep and wounds not completely
healed. Each and every company is vying to survive the downturn,
and striving to reach the helm.
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
macro-economic 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.
Let's Conclude
Based on 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 competitive
pricing, compelling products and innovative ways to attract
shoppers.
Given the pros and cons, 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
Report
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