We are reiterating our long-term Neutral recommendation on Costco Wholesale Corporation (COST) with a price target of $80.00. Moreover, Costco holds a Zacks #3 Rank, which translates into a short-term Hold rating.
Costco continues to be a dominant retail wholesaler based on the breadth and quality of its merchandise. 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 see 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 maintains 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. The company plans to open 24 net new locations in fiscal 2011. 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 17% store sales increase in March 2011. Total net sales for March jumped 17% to $8.33 billion from $7.15 billion in the same month last year.
Costco continues to make prudent use of its free cash flows 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.
Moreover, Costco’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.
Costco currently operates 580 warehouses, including 424 in the United States and Puerto Rico, 80 in Canada, 32 in Mexico, 22 in the United Kingdom, 8 in Japan, 7 in Korea, 6 in Taiwan and 1 in Australia.
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