We reaffirm our long-term Neutral recommendation on
Costco Wholesale Corporation
) with a target price of $123.00, as risk and reward balances
itself. The stock also carries a Zacks Rank #3 (Hold).
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 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 6% in June,
following an increase of 5% in May, and reflecting comparable
sales growth of 6% at both the U.S. and international
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 third-quarter fiscal 2013, earnings
came in at $1.04 per share that surged 18.2% from 88 cents earned
in the prior-year period. The bottom-line improvement was buoyed
by top-line growth due to a rise in membership fees and improved
sales of discretionary items, as consumers seeking discounts
started flocking to warehouse clubs.
The warehouse retailer's total revenue, which includes net
sales and membership fee, climbed 7.9% to $24,083 million from
the prior-year quarter.
However, both the top and bottom lines missed the Zacks
Consensus Estimate of $25,096 million and $1.06 per share,
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 stock worth considering in the retail-wholesale
Bon-Ton Stores Inc.
) that carries a Zacks Rank #1 (Strong Buy).
BON-TON STORES (BONT): Get Free Report
COSTCO WHOLE CP (COST): Free Stock Analysis
TARGET CORP (TGT): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
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