Costco Retains Sales Momentum

Costco Wholesale Corporation ( COST - Analyst Report ) , one of the leading U.S. warehouse club operators, recently posted healthy sales data for the five-week period ended January 2, 2011.

The company sustained its sales, although the rate of growth decelerated. Aftera 9% increase in November 2010, Costco’s comparable-store sales for December rose 6%, reflecting comparable sales growth of 4% at its U.S. locations and 12% at its international divisions. For the eighteen-week period ended, the company registered comparable-store sales growth of 7%, with U.S. and international sales increasing 4% and 13%, respectively.

The sales results include contribution from the company's Mexico joint venture. Costco began incorporating results of its Mexico operations on a prospective basis with the commencement of its fiscal 2011 on August 30, 2010.

Excluding the effects of gasoline prices and a softer dollar, Costco’s comparable-store sales for December climbed 4%, with U.S. and international comparable sales increasing 3% and 8%, respectively. For the eighteen-week period ended, the company registered comparable-store sales growth of 5%, with U.S. sales rising 3% and international sales climbing 9%.

Total net sales for December jumped 11% to $9.19 billion from $8.26 billion in the same month last year. For the eighteen-week period, sales increased 11% to $29.78 billion from $26.83 billion delivered in the same period last year.

Excluding the contribution from the company's Mexico joint venture, sales would have increased 8%, for both five and eighteen-week periods, respectively.

On a regional basis, Costco registered robust performance in Texas, the Midwest and California. On an international basis (in local currencies) healthy results were witnessed in Korea, Mexico, Japan and Australia.

Costco currently operates 582 warehouses, including 425 in the United States and Puerto Rico, 80 in Canada, 32 in Mexico, 22 in the United Kingdom, 9 in Japan, 7 in Korea, 6 in Taiwan and 1 in Australia.

Costco continues to be a dominant retail wholesaler based on its breadth and quality of merchandise offered. 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 reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is strongly positioned in the warehouse club industry.

However, Costco faces stiff competition from BJ’s Wholesale Club Inc. ( ) and Sam’s Club, a division of Wal-Mart Stores Inc. ( WMT - Analyst Report ) . 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.

Currently, we have a Neutral rating on the stock. Moreover, Costco holds Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, correlates with our long-term recommendation.