Costco Wholesale Corporation (COST) continues to be a dominant retail wholesaler based on the breadth and quality of merchandises it offers. 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 budget-conscious customers continue to see it as a viable option for low-cost necessities. Having delivered comparable-store sales growth consistently, Costco is well positioned in the warehouse club industry.
Comps Remain Healthy
The company sustains its sales momentum as it moves further into 2012. After an 8% increase in February, Costco’s comparable-store sales for the month of March climbed 6%, reflecting comparable sales growth of 6% at its U.S. locations and 7% at its international divisions. In the prior-year period, the company delivered comparable-store sales growth of 13%.
Excluding the effects of higher gasoline prices and foreign currencies fluctuation, Costco’s comparable-store sales for March climbed 6%, with U.S. and international comparable sales increasing 5% and 9%, respectively.
The Drives
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.
Healthy Quarterly Results
Consumers seeking discounts started flocking to warehouse clubs, leading to improved sales of discretionary items. Consequently, Costco witnessed double-digit growth in the top line during the second quarter of 2012 that subsequently led to an increase in the bottom line. The company’s international operations have been the major driver.
Costco’s second quarter earnings of 90 cents a share came ahead of the Zacks Consensus Estimate of 88 cents, and rose 13.9% from 79 cents earned in the prior-year quarter. In the first quarter of 2012, the company had posted 12.7% growth in the bottom line
After registering a growth of 12.4% in the first quarter, the warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 10% year over year to $22,967 million during the second quarter, surpassing the Zacks Consensus Estimate of $22,737 million. Net sales jumped 10.1% to $22,508 million, whereas membership fee rose 7.7% to $459 million.
Costco’s comparable-store sales for the quarter rose 8%, reflecting a comparable sales increase of 8% both at its U.S. locations and international divisions. The results were favorably impacted by rising gasoline prices, but adversely affected by foreign exchange fluctuations.
Challenging Economy and Competition
The economy is still not out of the woods, and whether 2012 will mark a complete turnaround is difficult to predict unless some concrete steps are taken. Cuts are deep and wounds not completely healed. Each and every company is vying to survive the downturn, and trying every means to reach the helm.
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. In terms of performance, Target surpassed Costco, posting comparable-store sales growth of 7.3% for the month of March, and raising its first-quarter 2012 earnings per share guidance to a range of $1.04 to $1.10 from 97 cents to $1.07.
Moreover, the company’s customers are sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, a sluggish housing market, and high unemployment and household debt levels, which may affect their spending.
Closing Commentary
Based on the pulse of the economy, we believe that budget-constrained consumers will remain watchful of their spending and look for discounts. Consequently, we could see competitive pricing, compelling products and innovative ways to attract shoppers.
Given the pros and cons, we maintain our long-term “Neutral” recommendation on the stock. Moreover, Costco holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.
Costco currently operates 601 warehouses, which include 434 in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, 8 in Taiwan, 7 in Korea and 3 in Australia.
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