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 four-week period ended October 28, 2012 that betters analysts’ expectations. Sales for the month were positively impacted by inflation in gasoline prices and favorable foreign currency fluctuation.

Afteran ascension of 6% in September, Costco’s comparable-store sales for October climbed by 7%, reflecting comparable sales growth of an equivalent percentage at its U.S. locations and 9% at international outlets. In the prior-year period, the company delivered comparable-store sales growth of 9%.

Costco’s comparable-store sales for nine-week period ended October 28, 2012 rose by 7% buoyed by a 6% and an 8% 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 October augmented 5% with U.S. and international comparable-sales elevating by a similar rate. For the nine-week period, the company witnessed comparable-store sales growth of 5%, with U.S. sales increasing by an equal rate and international sales rising 6%.

Total net sales for October jumped 9% to $7.67 billion from $7.01 billion in the year-ago period. Costco’s sales for nine-week period increased 9% to $16.98 billion from $15.62 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.

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 10 new warehouses before December 31, 2012. It currently operates 612 warehouses, comprising 442 warehouses in the United States and Puerto Rico, 83 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 on their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers. What further concerns us is the recent Hurricane Sandy that led to the temporary closure of several warehouses and this could dent the sales results for November.

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 and well defines the company’s consistent comparable-store sales growth.