We initiate our coverage on Costco Wholesale Corporation (COST) with a Neutral recommendation, meaning the stock will perform in-line with the broader market. The company is one of the largest retailers in the warehouse club market in terms of revenues.
Earnings for the last quarter came in line with the Zacks Consensus Estimate. However, deflated gasoline prices, coupled with depressed consumer spending, dragged domestic store sales growth.
Costco sells foods and general merchandise (including household products and appliances) at discounted prices through membership warehouses. The company’s warehouses offer an array of low-priced nationally branded and select private labeled products in a wide range of merchandise categories. Costco also sells gasoline to customers at lower prices.
Costco 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 maintain a positive growth track amid beleaguered economic conditions, as cash-strapped customers continue to see Costco as a viable option for low-cost necessities.
Costco is well positioned to weather the difficult economic environment given its focus on low prices. The company has the highest square footage growth in the industry and remains committed to opening new clubs in the domestic and international markets. Costco’s diversification strategy is a natural hedge against risks that may arise in specific markets.
However, Costco faces stiff competition from BJ’s Wholesale Club (BJ) and Sam’s Club, a division of Wal-Mart Stores (WMT). These two rivals follow similar business models as they market high volumes of merchandise at low prices in a membership-only warehouse clubs. Moreover, Costco’s over-expansion in new markets invites the threat of cannibalization of existing stores.
Our assessment could also be impacted by an unfavorable consumer spending environment, fierce competition and higher start-up costs associated with expansion into new markets which may constrict margins.
Nevertheless, strong customer traffic, high membership renewal rates and new club openings will continue to help membership fee income growth in the upcoming quarters, thereby boosting overall sales.
Moreover, currency tailwinds coupled with the recent upswing in gasoline prices, will support same-store sales growth moving forward. However, these positives are reflected in the current lofty valuation, leaving limited room for above-market gain.
Read the full analyst report on “COST”
Read the full analyst report on “BJ”
Read the full analyst report on “WMT”
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