How Important Are Gasoline Prices To Costco?

October 24th, 2012 by Trefis Team
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Upside
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COST: Costco logo
COST
Costco

Gasoline prices in the U.S. crept higher in September and resulted in a positive impact on Costco’s (NASDAQ:COST) same-store sales growth. [1] The retailer reported an increase of 6% in the comparable store sales for September, and the rise in gasoline prices contributed 1% along with the strengthening of foreign currency. [2] However, gasoline business is one of the 8 product segments of Costco’s ancillary business which constitutes about 20% of company’s value according to our estimates. Even though large fluctuations in gasoline prices in certain months may drive Costco’s same store sales, the value of gasoline business for Costco is relatively low. Investors should instead focus on broader trend of warehouse club adoption by retail customers.

See our complete analysis for Costco

Significance Of Gasoline For Costco

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For the month of September, Costco’s same store sales increased by 6%, with 1% contribution coming from higher gasoline prices and strengthening of foreign currency. [2] In fiscal 2012, the retailer reported a same store sales growth of 7% in the U.S. with gasoline contributing 1%. [3] So while on the surface the gasoline business seems like a large contributor to the same store sales growth, its share in the increase of the overall revenues was less than 10% in fiscal 2012 owing to its very low profit margins. [3] Apart from the increase in the same store sales, the revenue growth is also attributed to new store openings.

Furthermore, the gasoline prices fluctuate considerably and therefore have a certain risk associated with it. In fiscal 2011, Costco reported an increase of about $1.6 billion in its revenues due to the increase in gasoline prices. The figure for fiscal 2012 stood at $800 million. [3] [3] Given the price fluctuations and low margins, the intrinsic value for gasoline business is quite low for Costco.

Costco’s Business Structure And Limited Direct Competition Will Be the Main Drivers.

As the economic growth remains sluggish, we expect the U.S. consumers to be extra cautious about their spending. Buying in bulk from a warehouse club might be a healthier option due to the available discounts. Moreover, in the international markets, the concept of a warehouse club is relatively new and may attract price conscious customers.

Costco has a limited direct competition from other warehouse clubs such as Sam’s Club and BJ’s Wholesale club. Costco’s total stores in the U.S. are slightly less than Sam’s Club’s, but it generates more revenues than the latter. [3] [4] This indicates that Costco is strongly established and puts it in a good position to leverage its business structure and consumer preferences to drive revenue growth. Inspired by the response of its customers, the retailer recently announced plans for aggressive expansion by opening almost twice as many stores in fiscal 2013 than it did a year before. [5]

Our price estimate for Costco stands at $111, implying a premium of about 15% to the market price.

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Notes:
  1. U.S. Retail Gas Price, Ycharts, Oct 22 2012 [↩]
  2. Costco September same store sales rise 6 pct, Reuters, Oct 4 2012 [↩] [↩]
  3. Costco’s SEC filings [↩] [↩] [↩] [↩] [↩]
  4. Wal-Mart’s SEC filings [↩]
  5. Costco’s Q4 fiscal 2012 earnings transcript, Oct 10 2012 [↩]