Still Neutral on Costco - Analyst Blog

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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.

Early December, Costco revealed its comparable-store sales data for the month of November. Comparable-store sales for November climbed 6%, after an increase of 7% in October, and reflect comparable sales growth of 6% at its U.S. locations and 7% at international outlets. In the prior-year period, the company delivered comparable-store sales growth of 9%.

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 opened 16 net new locations in fiscal 2012, and plans to open 30 new outlets in fiscal 2013. The company's diversification strategy is a natural hedge against risks that may arise in specific markets.

Costco recently came out with its first-quarter fiscal 2013 results. The quarterly earnings of 95 cents a share beat the Zacks Consensus Estimate by a couple of cents, and surged 18.8% from 80 cents earned in the prior-year period. The warehouse retailer's total revenue, which includes net sales and membership fee, climbed 9.6% to $23,715 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $23,761 million.

The economy is still not out of the woods, and whether 2013 will mark a complete turnaround is difficult to predict unless some concrete steps are taken. Each and every company is vying to survive the downturn and 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, housing market, and unemployment and household debt levels, which may affect their spending.

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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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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