Why Costco Wants to Keep Expanding Overseas More and More

COST Operating Margin (TTM) Chart

From a review of its financial filings, you wouldn't describe Costco as a global retailer. Sure, it runs warehouses in several international markets (eight, to be exact). But it generates 70% of revenue directly from its primary market, the U.S.

COST Operating Margin (TTM) Chart

COST Operating Margin (TTM) , data by YCharts

Management doesn't see the profitability gap changing any time soon. In response to a Wall Street analyst question on the "sustainability of these high [international] margins" in a recent conference call, Chief Financial Officer Richard Galanti said "some of the most profitable countries will come down a bit, but are still going to be higher than the U.S."

Greater opportunity

International markets also offer stronger potential for square footage growth, as they aren't yet blanketed with warehouse clubs. Club penetration in Canada, for example, is about 2.5 warehouses per 1 million residents. Mexico's warehouse club penetration stands at an even less dense 1.8.

By comparison, the United States has by far the greatest penetration at over 4 warehouses per 1 million residents, thanks to the 1,100 warehouses split between Costco and Wal-Mart 's Sam's Club.

That adds up to significantly greater market potential overseas, relative to the United States. You can see how Costco benefits from these less competitive climates by checking sales growth. Comparable-store sales growth in international markets matched (or soundly beat) the U.S. figures for the last five years.

Year International Comps U.S. Comps
2015* 7% 7%
2014 7% 5%
2013 6% 6%
2012 8% 6%
2011 10% 5%
2010 8% 2%

2015 includes the last three quarters. All comps exclude gas and foreign exchange swings. Source: Costco financial filings.

The takeaway for investors here is that while Costco has attractive opportunities in the U.S., it will likely focus investments outside of its home market in the future. International expansion carries extra risks, but the payoff to shareholders should include higher sales growth and greater profitability.

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The article Why Costco Wants to Keep Expanding Overseas More and More originally appeared on

Demitrios Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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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.

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