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Costco Wholesale Corporation (COST - Analyst Report) came out with better-than-expected fourth-quarter 2012 results today. The quarterly earnings of $1.39 per share beat the Zacks Consensus Estimate of $1.30, and surged 28.7% from $1.08 earned in the prior-year period.

The boost in the bottom-line was buoyed by a double-digit growth in the top-line due to improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs, and rise in membership fees.

Let’s Unveil

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 14.3% to $32,218 million from the prior-year quarter, and surpassed the Zacks Consensus Estimate of $31,902 million. Net sales jumped 14.3% to $31,524 million, whereas membership fee rose 17.6% to $694 million.

Costco’s comparable-store sales for the fourth quarter of fiscal 2012 ascended 5% buoyed by a 6% and 2% jump in comparable-store sales in the U.S. and international locations, respectively. The results were adversely impacted by inflation in gasoline prices and foreign currencies fluctuation. In the prior-year quarter, the company delivered comparable-store sales growth of 12%.

Excluding the effects of gasoline prices and foreign currencies, the company witnessed comparable-store sales growth of 6%, with U.S. sales increasing by a similar rate and international sales rising 7%.

Recently, Costco came out with comparable-store sales data for the month of September. After an 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.

Costco’s operating income surged 24.5% to $949 million, whereas, operating margin (as a percentage of total revenue) expanded marginally by 20 basis points to 2.9%.

Financial Aspects

Costco ended fiscal 2012 with cash and cash equivalents of $3,528 million, long-term debt of $1,381 million, and shareholders’ equity of $12,361 million, excluding non-controlling interests of $157 million.

Let’s Conclude

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 Target Corporation (TGT - Analyst Report) and 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.

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, 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.

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