Having delivered consistent comparable-store sales (comps) growth, Costco Wholesale Corporation (COST) is well positioned in the warehouse club industry. The company has unswervingly registered comps growth from January through November.
Within this period, comps growth touched a low of 2% and hit a high of 7%, thereby recording an average of approximately 4.8%. In the first eleven months of 2014, comps increased 4% in January, 2% in February, 5% in both March and April, 6% in both May and June, 5% in July, 7% in August, 4% in both September and October, and 5% in November.
Impressive comps performance helped Costco to commence fiscal 2015 on a strong note, delivering better-than-expected first-quarter results. The company posted earnings of $1.12 per share that surpassed the Zacks Consensus Estimate of $1.09 and rose 16.7% from 96 cents reported in the prior-year period. Total revenue climbed 7.4% to $26,866 million from the prior-year quarter, and came ahead of the Zacks Consensus Estimate of $26,831 million.
Costco 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 to sustain growth, as budget-constrained 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.
However, Costco faces stiff competition from Target Corporation (TGT) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT), which follow 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.
Going by the pulse of the economy, we believe that cash-strapped 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).
Other Stocks Worth Considering
A better-ranked stock worth considering in the retail sector is Burlington Stores, Inc. (BURL), which carries a Zacks Rank #2 (Buy).
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