Costco Wholesale Corporation (COST) continues to be a dominant retail wholesaler based on its breadth and quality of merchandise offered. The company’s strategy to sell products at heavily discounted prices has helped it to remain on a positive growth track amid beleaguered economic conditions as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is well positioned in the warehouse club industry.
A differentiated product range enables Costco to provide an upscale shopping experience for its members, resulting in market share gains and higher sales per square foot. Moreover, the company continues to maintain a healthy membership renewal rate.
We are also encouraged by the company’s expansion strategy. Costco remains committed to opening new clubs in domestic and international markets. During fiscal 2011, the company plans to open 15 to 16 new warehouses. The company’s diversification strategy is a natural hedge against risks that may arise in specific markets. International comparable-store sales are growing at a healthy pace as reflected by the 12% store sales increase in second-quarter 2011.
Costco continues to make prudent use of its free cash flow through share repurchases and dividend payments. This underlines its efforts to maximize shareholder returns even under trying economic conditions. Moreover, the company’s current cash resources are adequate to support expenditures associated with its ongoing expansion initiatives.
However, Costco faces stiff competition from BJ’s Wholesale Club Inc. (BJ) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT). These two rivals follow similar business models as they market 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.
Costco currently operates 581 warehouses, including 424 in the United States and Puerto Rico, 80 in Canada, 32 in Mexico, 22 in the United Kingdom, 9 in Japan, 7 in Korea, 6 in Taiwan and 1 in Australia. Following the recent disaster in Japan, the company had to shutter its Tamasakai warehouse.
The earthquake and tsunami that hit Japan will have an impact on consumer spending and the overall economy of the country, which remains home to many luxury goods. The rippling effect of this was evident even in the U.S. with shares of Tiffany & Company (TIF) known for its high-end jewelry and Coach Inc. (COH), the designer and marketer of fine accessories and gifts, tumbling 5.3% at closing on Monday. Tiffany generates 19% and Coach derives 20% of its sales from Japan. About 20 Coach stores were closed following the catastrophe.
Polo Ralph Lauren Corporation (RL), which has operations in Japan, witnessed a 2.8% drop in shares on Monday closing, whereas shares of Nike Inc. (NKE) slipped 1.1%.
Currently, we have a long-term “Neutral” rating on Costco. Moreover, the stock holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
BJ’S WHOLESALE (BJ): Free Stock Analysis Report
COACH INC (COH): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis Report
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POLO RALPH LAUR (RL): Free Stock Analysis Report
TIFFANY & CO (TIF): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
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