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Costco Stays Neutral

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We reaffirm our long-term Neutral recommendation on Costco Wholesale Corporation (COST - Free Report) , following the company’s second-quarter fiscal 2013 results.

Why the Reiteration?

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandises it offers. The company’s strategy to sell products at heavily discounted prices has helped it maintain positive growth amid the beleaguered economic conditions as budget-conscious customers continue to see it as a viable option for low-cost necessities.

Having delivered comparable-store sales growth consistently, Costco is well positioned in the warehouse club industry.

Costco recently came out with its second-quarter fiscal 2013 results. The quarterly earnings of $1.10 per share beat the Zacks Consensus Estimate of $1.05, and surged 22.2% from 90 cents earned in the prior-year period.

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

This Zacks Rank #2 (Buy) stock has outpaced the Zacks Consensus Estimates in the last three consecutive quarters, and has beat the Estimates in the last 4 quarters by an average of 4.6%.

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 8.3% to $24,871 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $25,109 million. Moreover, the rate of growth of comparable-store sales decelerated to 5% in the second quarter from 7% in the first quarter of fiscal 2013.

Costco faces stiff competition from Target Corporation (TGT - Free Report) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT - Free 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.

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 during this holiday season.

Other Stocks Worth Considering

The other stock worth considering in the non-food retail-wholesale sector is Sears Holdings Corporation that carries a Zacks Rank #2 (Buy).

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