Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted sales data for the four-week period ended August 26, 2012 that betters analysts’ expectations. Sales for the month were favorably impacted by inflation in gasoline prices, which mitigated the adverse effect of foreign currencies fluctuation.
After a 5% increase in July, Costco’s comparable-store sales for August climbed up 6%, reflecting comparable sales growth of 7% at its U.S. locations and 4% at international outlets. In the prior-year period, the company delivered comparable-store sales growth of 11%.
For the 52-week period ended August 26, 2012, the company registered comparable-store sales growth of 7%, with U.S. sales rising by an equivalent percentage and international sales climbing up 6%.
Excluding the effects of gasoline prices and foreign currency fluctuations, Costco’s comparable-store sales for August augmented 6% with U.S. and international comparable sales increasing by a similar percentage. For the 52-week period, the company registered comparable-store sales growth of 6%, with U.S. sales escalating 6% and international sales climbing 9%.
Total net sales for August jumped 8% to $7.40 billion from $6.85 billion in the same month last year. For the 52-week period, sales increased 9% to $95.12 billion from $87.05 billion in the same period last year.
Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandises it offers. The company’s strategy to sell products at heavily discounted prices has helped it sustain growth amidst 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 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’s diversification strategy is a natural hedge against risks that may arise in specific markets.
However, 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.
Costco plans to open two warehouses, one each in Korea and Taiwan. This will result in 608 warehouses at the end of fiscal 2012, comprising 439 warehouses in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, 9 in Taiwan, 8 in Korea and 3 in Australia. The company expects to open 15 additional warehouses during the period commencing September 3, 2012, when fiscal 2013 starts, to December 31, 2012.
Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful on their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.
Currently, we maintain our long-term “Neutral” recommendation on the stock. However, Costco holds a Zacks #2 Rank that translates into a short-term “Buy” rating.
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