Costco Posts Healthy Comps

Costco Wholesale Corporation (COST - Analyst Report), one of the leading U.S. warehouse club operators, recently posted sales data for the five-week period ended September 30, 2012 that betters analysts’ expectations. Sales for the month were favorably impacted by inflation in gasoline prices and foreign currencies fluctuation.

Afteran ascension of 6% in August, Costco’s comparable-store sales for September climbed by an equivalent percentage, reflecting comparable sales growth of 6% at its U.S. locations and 7% at international outlets. In the prior-year period, the company delivered comparable-store sales growth of 12%.

Costco’s comparable-store sales for the fourth quarter of 2012 rose by 5% buoyed by a 6% and 2% jump in comparable-store sale in the U.S. and international locations.

Excluding the effects of gasoline prices and foreign currency fluctuations, Costco’s comparable-store sales for September augmented 5% with U.S. and international comparable-sales elevating 5% and 6%, respectively. For the fourth quarter, the company witnessed comparable-store sales growth of 6%, with U.S. sales increasing by a similar rate and international sales rising 7%.

Total net sales for September jumped 8% to $9.31 billion from $8.61 billion in the year-ago period. Costco’s fourth quarter sales soared 14% to $31.52 billion from $27.59 billion in the year-ago quarter.

Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandises it offers. The company’s strategy to sell products at heavily discounted prices has helped it sustain growth amidst 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 well positioned in the warehouse club industry.

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.

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

Costco expects to open 14 new warehouses before December 31, 2012. It currently operates 608 warehouses, comprising 439 warehouses in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, 9 in Taiwan, 8 in Korea and 3 in Australia.

The company is slated to release its fourth quarter and fiscal 2012 results on October 10. The current Zacks Consensus Estimate for the quarter is $1.30 per share, which reflects a growth of 20.4% from the prior-year quarter’s earnings. The Zacks Consensus estimates revenue at $31,885 million for the quarter. The current Zacks Consensus Estimate for fiscal 2012 is $3.86 per share. Further, analysts polled by Zacks expect full year revenue to be $98,849 million.

Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful on their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.

Currently, we maintain our long-term “Neutral” recommendation on the stock. However, Costco holds a Zacks #2 Rank that translates into a short-term “Buy” rating.