Costco Wholesale Corporation (COST) continues to be a dominant retail wholesaler based on the range and quality of merchandise it offers. The company's strategy of selling products at heavily discounted prices has helped it maintain growth amid soft economic conditions as budget-conscious customers continue to see it as a viable option for low-cost necessities.
We believe that Costco's differentiated product range enables it to provide an upscale shopping experience to its members, resulting in market share gains and higher sales per square foot. Moreover, it continues to maintain a healthy membership renewal rate. The company is also gradually expanding its e-commerce capabilities in the U.S., Canada, U.K. and Mexico.
Having delivered comparable-store sales growth consistently, Costco is well positioned in the warehouse club industry. It delivered comparable-store sales growth of 7% in August. The company’s fourth-quarter fiscal 2014 sales results also at hint the same, with the top-line growth rate having accelerated to 9% from 7.1% in the third quarter and comparable-store sales increasing 6%. The company benefited from increasing consumer confidence, improving job prospects and back-to-school promotional strategies.
However, what remains as a drawback for Costco is that in the trailing four quarters, it has missed the Zacks’ expectation by an average of 5.5%. It has delivered negative earnings surprises of 1.8%, 10.3% and 5.9% in the third, second and first quarters of fiscal 2014, respectively, and 4.1% in the fourth quarter of fiscal 2013.
Moreover, 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 margins.
Going by 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 more competitive pricing, compelling products and innovative ways to attract shoppers.
Currently, Costco carries a Zacks Rank #3 (Hold).
Stock Worth Considering
A better-ranked stock in the retail sector is Burlington Stores, Inc. (BURL) with a Zacks Rank #1 (Strong Buy).
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