Costco Exits 2011 with Strength - Analyst Blog

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Costco Wholesale Corporation ( COST ) has battled through a tough economy and exited 2011 boldly. The U.S. economy has been reeling under the ongoing financial crisis, whose rippling effects gradually engulfed theglobal market Amid this turbulent environment, Costco has almost been able to overcome the hurdles keeping an upbeat note, and we believe it to continue with its momentum in 2012.

Costco continues to be a dominant retail wholesaler based on the breadth and quality of 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.

Riding on Positive Comps

Costco is well positioned in the warehouse club industry, having delivered positive comps consistently in 2011.

During a period from January to December, 2011, Costco has consistently registered comparable-store sales growth. In that period, comps growth touched a low of 7% in December and hit a high of 14% in June, thereby recording an average growth of approximately 10.6%. This is much better than its competitor Target Corporation ( TGT ), which witnessed an average comparable-store increase of 3.2% in the same period.

In the last four months of 2011, comps increased 12% in September, 9% in both October and November.

Given the current macro-economic environment, monthly sales data for Costco is also encouraging, registering a consistent growth. The company in the span of January to December 2011 registered a minimum sales growth of 9% in December, and a maximum growth of 18% in June, reflecting an average growth of approximately 14.4% for the period. The company in the last four months registered sales growth of 15% in September, 11% in both October and November, and 9% in December.

What Drives Growth

Differentiated product range enables Costco to provide an upscale shopping experience to its customers, 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.

Challenging Economy and Competition

The economy is still not out of the woods, and whether 2012 will mark the resurrection is tough to say, unless some concrete steps are taken to avoid another recession. Cuts are deep and many wounds have not yet healed.

Costco faces stiff competition from Target 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, sluggishness in the housing market, and high unemployment and household debt levels, which may affect spending.

Closing Remark

Based on the pulse of the economy, we believe that budget-constrained consumers will remain watchful on their spending and look for huge discounts. Consequently, we could see more 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 and correlates with our long-term view.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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