Costco Wholesale Corporation (COST) recently entered into an agreement with Controladora Comercial Mexicana, under which it will acquire the latter’s 50% stake in its Mexican joint venture, Costco de Mexico, for approximately $760.4 million. The deal, which gives full control of the operations, is said to be judicious on the part of Costco’s international expansion.
Additionally, Costco de Mexico, which is managed by Costco Wholesale, declared a cash dividend of approximately $340.9 million, to be allocated equally between Costco and Controladora Comercial Mexicana.
Costco, one of the leading U.S. warehouse club operators, hinted that it will utilize the amount of dividend along with its existing cash balances to fund the buyout. On the other hand, Controladora Comercial Mexicana informed that it will employ the dividend and sale proceeds in repaying the debt.
The transaction is yet to be approved by the Mexican Federal Competition Commission and Controladora Comercial Mexicana’s stakeholders. Costco stated that Guillermo Gonzalez Nova, the chairman and Carlos Gonzalez Zabalegui, the CEO of Controladora Comercial Mexicana will remain on the board of Costco de Mexico, while Jaime Gonzalez Solana will continue to serve Costco de Mexico as CEO.
Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandise it offers. The company’s strategy to sell products at heavily discounted prices has helped it to remain on a positive growth track amid the beleaguered economic conditions, as cash-strapped customers continue to see it as a viable option for low-cost necessities.
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 open new clubs in domestic and international markets. The company’s diversification strategy is a natural hedge against risks that may arise in specific markets.
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.
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.
Currently, 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 WHOLE CP (COST): Free Stock Analysis Report
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