International Stores to Drive Costo’s Growth

July 16th, 2010 by Trefis Team
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Costco (NASDAQ:COST) is the second-largest U.S. retailer, with 2009 revenues of about $70 billion. Costco is the largest retailer in the warehouse club category, where it competes with Wal-Mart’s (NYSE:WMT) Sam’s Club and BJ’s Wholesale Club (NYSE:BJ).

Like other warehouse clubs, Costco extracts membership fees from its customers in exchange for heavy discounts on merchandise.

We estimate that international merchandise sales account for close to 20% of our $49.76 estimate of Costco’s stock. We expect international sales to drive Costco’s growth going forward.  Our analysis follows below.

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International growth prospects

Costco operated nearly 140 international stores at the end of 2009. We expect the total number of international stores to reach 210 by the end of our forecast period, driven by opportunities in under-served overseas markets and the saturation of the U.S. market.

Costco already has significant presence in Canada (77 stores) and the U.K. (21 stores).   Asia and Australia are a major growth opportunity for the company, accounting for only 16% of its  international stores in 2009. Costco has the capacity to operate another 20 stores in Australia and about 100 more stores in Taiwan, Korea and Japan combined.

You can modify the chart below to see how international expansion impact’s Costco’s stock price:

International revenue per square foot expected to grow

We estimate that revenue per square foot for international Costco stores stood at around $705 in 2009, compared to $814 per square foot for U.S. stores during the same period.

However, we expect international revenue per square foot to increase in coming years, driven by the following factors:

  1. Because of its business model, Costco faces limited competition from from local retailers in international markets. Businesses account for the majority of the company’s merchandise sales. These sophisticated customers are attracted by the cost savings available at Costco and other warehouse clubs.
  2. Sales growth at comparable stores has been growing faster overseas. In the fourth quarter of 2009, ending August 31, Costco reported comparable stores sales growth of about 1% in US and 7% internationally, excluding the unfavorable impact of gas deflation and foreign exchange. The trend continued in September 2009 with reported growth of 7% for international stores versus -1% for U.S. stores.

You can see the complete $49.7.6 Trefis price estimate for Costco’s stock here