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Costco Wholesale Banks on Expansion Strategy for Growth

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Costco Wholesale Corporation (COST - Free Report) is riding high on back-to-back earnings beat, shareholder friendly moves and expansion strategy. However, these signs of optimism are clouded by intense competition and dismal comparable sales performance.

Hidden Catalysts

Costco continues to be one of the dominant warehouse club chain based on the breadth and quality of merchandise offered. The company’s strategy to sell products at heavily discounted prices has helped it to remain on growth track as cash-strapped customers continue to consider Costco as a viable option for low-cost necessities. Moreover, it continues to maintain healthy membership renewal rate. Additionally, the company is gradually expanding its e-commerce capabilities in the U.S., Canada, the U.K., Mexico, Korea and Taiwan.

We are also impressed with the company’s strategy to expand its business globally. Costco has one of the highest square footage growth in the industry, and remains committed to opening new clubs in the domestic and international markets. The company opened 23 net new locations and 29 net new outlets in fiscal 2015 and 2016, respectively. Further, the retailer plans to open nearly 31 net new outlets in fiscal 2017, of which 17 are expected to be opened in the U.S. while the remaining in the international markets.

With regards to its shareholder friendly moves, the company has been consistently buying back shares. The company repurchased $477 million in fiscal 2016, $493 million in fiscal 2015 and $333 million in fiscal 2014.

COSTCO WHOLE CP Price and Consensus


COSTCO WHOLE CP Price and Consensus | COSTCO WHOLE CP Quote

Hurdles to Overcome  

Investors are worried about Costco’s sluggish comparable-store sales (comps) performance. Costco’s comps during the fourth quarter of fiscal 2016 remained flat, and exhibit a 2% increase in comps across its Canadian locations, offset by a 1% and 2% decline registered at its U.S. and Other International locations, respectively. While lower gasoline prices impacted U.S. comps, currency fluctuations adversely affected international comps. On the revenue front, the company has missed the Zacks Consensus Estimate in the seven straight quarters.

Costco faces stiff competition from BJ’s Wholesale Club and Sam’s Club, a division of Wal-Mart Stores. These two rivals follow similar business models as they market high volumes of merchandise at low prices in a membership-only warehouse clubs.

Stocks to Consider

Investors interested in the retail space may consider stocks such as American Eagle Outfitters, Inc. (AEO - Free Report) , The Children's Place, Inc. (PLCE - Free Report) and Urban Outfitters Inc. (URBN - Free Report) .

American Eagle Outfitters has surpassed the Zacks Consensus Estimate in the trailing four quarters and also has a long-term earnings growth rate of 11.8%.

The Children's Place has long-term earnings growth rate of 10.3%.   

Urban Outfitters shares have gained nearly 28% in the past one year.

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