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Costco Looks Disciplined on Solid Comps, Growth Strategies

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A glimpse at Costco Wholesale Corporation (COST - Free Report) share price movement reveals that it has surged 13.4% in a year compared with the industry’s gain of 3.9%. This clearly indicates that the stock with long-term earnings per share growth rate of 9.7% looks quite disciplined in its approach to adapt to the changing retail landscape.

In fact, major chains are grappling with sluggish store and mall traffic as consumers choose to shop online. But Costco’s growth strategies and sturdy comparable-store sales (comps) performance have a different story to tell.

Dominant Warehouse Retailer

We believe that Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. In fact, the company’s strategy to sell products at heavily discounted prices has helped it to remain on a growth track as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities.

Additionally, a differentiated product range enables Costco to provide an upscale shopping experience for its members, thereby resulting in market share gains and higher sales per square foot. It is also gradually expanding e-commerce capabilities in the United States, Canada, the U.K., Mexico, Korea and Taiwan. Consequently, comparable e-commerce sales for October surged 31%.

 

 

Positive Comps Performance Continues

Costco continued with positive comparable-store sales (comps) performance driven by improved store traffic and average transaction size. Comps for October increased 7.5%, following an increase of 8.9% in September, 7.3% in August, 6.2% in July, 6% in June, 4.1% in May, 3% in April, 6% in March, 4% in February and 7% in January. Notably, net sales increased 10.1%, 12.1%, 10%, 8.8%, 7%, 7%, 5%, 9%, 8% and 9% in October, September, August, July, June, May, April, March, February and January, respectively.

Enhancing Global Footprint

We are encouraged by the company’s expansion strategy. Evidently, Costco has one of the highest square footage growth in the industry and remains committed toward opening new clubs in domestic and international markets. In sync with this, it opened 23, 29 and 26 net new outlets in fiscal 2015, 2016 and 2017, respectively, and plans to open nearly 25 net new warehouses in fiscal 2018. In our view, the company’s diversification strategy is a natural hedge against risks that may arise in specific markets.

Deterrents to Overcome

Stiff competition and cautious consumer spending remain major threats. Investors also remain concerned about contraction in gross margin and marginal decline in membership renewal rates that is expected to continue for at least a quarter or two.

Costco carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Picks

Investors may consider top-ranked stocks such as Big Lots, Inc. (BIG - Free Report) , Dollar General Corporation (DG - Free Report) and Ross Stores, Inc. (ROST - Free Report) all carrying a Zacks Rank #2 (Buy).

Big Lots delivered an average positive earnings surprise of 81.1% in the trailing four quarters and has a long-term earnings growth rate of 13.5%.

Dollar General pulled off an average positive earnings surprise of 1.8% in the trailing four quarters and has a long-term earnings growth rate of 10.8%.

Ross Stores came up with an average positive earnings surprise of 6.3% in the trailing four quarters and has a long-term earnings growth rate of 10%.

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