Costco Wholesale Corporation
) continues to be a dominant retail wholesaler based on the range
and quality of merchandise it offers. The company's strategy of
selling products at heavily discounted prices has helped it
maintain growth amid beleaguered economic conditions as
budget-conscious customers continue to see it as a viable option
for low-cost necessities.
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 rate. The
company is also gradually expanding its e-commerce capabilities in
the U.S., Canada, U.K. and Mexico.
Having delivered comparable-store sales growth consistently,
Costco is well positioned in the warehouse club industry. It
delivered comparable-store sales growth of 6% in May. The company's
third-quarter fiscal 2014 results also depict improvement, wherein
top-line growth rate rose to 7.1% from 5.8% in the second quarter,
while comparable-store sales increased 4%.
The quarterly earnings of $1.07 per share rose 2.9% from the
prior-year period but missed the Zacks Consensus Estimate by a
couple of cents. Costco has delivered negative earnings surprises
in the last 4 quarters - 1.8%, 10.3% and 5.9% in the third, second
and first quarters of fiscal 2014, respectively, and 4.1% in the
fourth quarter of 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 margins.
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 attract
Currently, Costco carries a Zacks Rank #3 (Hold).
Other Stocks Worth Considering
A better-ranked stock worth considering in the retail sector is
The Kroger Co.
) carrying a Zacks Rank #2 (Buy).
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