Articles for Costco

Costco’s July Sales Grow Strong but Miss Estimates Due to Fewer Store Visits and Currency Fluctuations

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Friday, August 8th, 2014 by

Costco (NASDAQ:COST) recently reported its July sales results and missed analysts’ estimates for the first time in the last five months. The retailer’s comparable sales increased by 5% during the month, while the market expected the metric to increase by 6%. However, excluding the impact of lower gasoline prices and foreign currency fluctuations, Costco’s comparable sales growth was in line with the consensus estimate. Overall, the company’s net sales grew by 9% to $8.55 billion and its comparable sales increased by 5% in the U.S. and 7% abroad.

Amid an uncertain economic environment in the U.S., the warehouse shopping model has become very popular among buyers looking for cost-saving deals. Being the strongest warehouse retailer in the U.S., Costco has been customers’ first choice, which is evident from its growing member base. For several quarters now, the company has registered a rise in its membership renewal rates and new membership signups.

While Costco’s July growth was driven by the continued adoption of warehouse shopping model, a decline in store traffic across the industry had a marginally negative impact. During July, some buyers preferred Internet shopping over store shopping, which had a notable negative impact on the industry-wide store traffic. Yet, the surge in online orders resulted in better-than-expected retail sales growth across the market. Sales of eight retailers tracked by Thomson Reuters increased by 4.4%, which was slightly ahead of the expected 4.2% growth. Since Costco’s online channel isn’t too big, its store traffic decline would have easily overpowered a strong surge in online revenues.

Our price estimate for Costco stands at $123, implying a premium of less than 5% to the market price.

See our complete analysis for Costco

Rise Is Membership Base Is Driving Comparable Sales

Historically, Costco has generated the bulk of its comparable sales growth from an increase in number of members, which appears to be the case in July as well. While the company does not provide details related to its member base on monthly basis, we will consider the increase in number of members from Q3 fiscal 2013 (the quarter that ended before July 2013) to Q3 fiscal 2014, as an indicator for the rise in member base for July 2014. As of May 11 2014, Costco had about 74.6 million cardholders, while it had only 69.9 million cardholders in the quarter ending on May 12 2013. Making a conservative assumption that the number of cardholders from May to July increased by a similar amount during both the years, we conclude that July 2014 had 4.7 million more cardholders that July 2013. Also, membership renewal rates in North America and worldwide were 90.6% and 87.3%, respectively, at the end of Q3 fiscal 2014, up from 89.9% and 86.4% respectively, in the same quarter last year.

Slump in Store Visits Might have had a Marginally Negative Impact

Due to increased proliferation of smartphones and tablets, and the convenience of web shopping, U.S. buyers have been making more purchases online. Subsequently, they are visiting fewer stores, which is troubling a number of retailers who do not have a sizable online presence. As per the data compiled by ShopperTrak, a firm that tracks store traffic in over 40,000 outlets across the U.S., store visits have fallen consistently by close to 5% year-over-year in all the months of the past two years. This trend continued in July as 5% fewer shoppers went out for shopping, which impacted the sales of retailers such as Costco and Wal-Mart (NYSE:WMT) who rely on store sales for a bulk of their revenues. It must be noted that even though Costco’s online sales might have increased considerably, its web channel isn’t big enough to have a noticeable impact on sales growth. Also, July is traditionally a clearance month in which retailers discount their products to make room for back-to-school inventory. Costco might have also done the same, which would have resulted in a marginal slowdown in its sales growth.

Although Costco could not meet market expectations in July, we believe that the consensus estimate was a little optimistic. Moreover, foreign currency fluctuations had a negative impact of a whole percentage point on the company’s comparable sales growth. Considering this, we conclude that Costco hasn’t lost any growth momentum in July despite the unfavorable environment.

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Costco Sustains Its Growth Momentum In June

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Friday, July 11th, 2014 by

Warehouse giant Costco (NASDAQ:COST) recently reported its June sales results that were slightly better than analysts’ expectations. The retailer’s net sales grew by 10% to $10.89 billion and its comparable sales increased by 6% with similar growth in the U.S and 7% growth in international markets. Excluding the impact of foreign currency fluctuations, Costco registered 8% growth in its international comparable sales. June was the fourth consecutive month when Costco was able to beat street estimates driven by its growing member base.

Amid an uncertain economic environment in the U.S., warehouse shopping model has become very popular among buyers looking for cost-saving deals. Being the strongest warehouse retailer in the U.S., Costco has been customers’ first choice, which is evident from its growing member base. For several quarters now, the company has registered a rise in its membership renewal rates and new membership signups. Also in international markets, Costco has found tremendous acceptance due to its unique shopping model that promotes cost savings.

While Costco’s supremacy in the U.S. propelled its growth in June, strong retail trends during the month also had a positive impact. According to Redbook Research’s latest reports, retail sales in June increased by 3.8% driven by strong sales during the Independence Day weekend. June 2014 was a five-week period on the U.S. retail calender that ended on July 5. Strong sales of seasonal products and attractive promotions during the last week of June boosted store traffic, resulting in 6% rise in sales during the week as compared to the same period last year. Costco also observed the Independence Day in its 34 days June retail period.

Our price estimate for Costco stands at $123, implying a premium of less than 5% to the market price.

See our complete analysis for Costco

Rise In Number Of Members Is Driving Growth For Costco.

Costco’s June results look impressive considering that its comparable store sales growth in the U.S. (6%) and international markets (8%) was on top of similar growth figures seen in the same month last year. While the company does not provide details related to its member base on monthly basis, we believe that a rise in number of members was the primary growth driver for its comparable sales growth in June. For the purpose of this analysis, we will consider the increase in number of members from Q3 fiscal 2013 (the quarter that ended before June 2013) to Q3 fiscal 2014, as an indicator for the rise in member base for June 2014. As of May 11 2014, Costco had about 74.6 million cardholders, while it had only 69.9 million cardholders in the quarter ending on May 12 2013. Making a conservative assumption that the number of cardholders from May to June increased by a similar amount during both the years, we conclude that June 2014 had 4.7 million more cardholders that June 2013. Also, membership renewal rates in North America and worldwide were 90.6% and 87.3%, respectively, at the end of Q3 fiscal 2014, up from 89.9% and 86.4% respectively, in the same quarter last year.

Growing popularity of warehouse shopping model and Costco’s attractive bargains have played a crucial role in driving its member base. Some consumer reports suggest that buyers can save up to 55% while shopping at warehouse clubs. Due to these attractive bargains, warehouse club industry sales have grown at a significantly higher rate than general merchandise store sales in the U.S. over the past decade. Being the largest player in the industry, Costco has been at the forefront of this growth. As a warehouse retailer, Costco keeps its product markups low at 15%, while several supermarket chains markup their goods by 25%. The retailer changes the brands and product categories in its stores regularly to give its customers a “treasure hunt” experience. To add a greater appeal, Costco adds high-end products such as Coach (NYSE:COH) purses and Dom Perignon champagne to its shelves from time to time. The company offers a number of private label brands that are cheaper than national brands, but comparable in quality. These brands are very popular among Costco’s customers and have played an important role in its sales growth.

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Costco Is Not Eying China For Now

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Tuesday, July 1st, 2014 by

Warehouse giant Costco (NASDAQ:COST), which has operations in nine countries, including the U.S. and Mexico, still does not have any concrete plans for China. This is somewhat surprising considering that China is the second largest economy in the world with a huge retail market that stands well over $2 trillion and is growing at a robust pace. The region has been among the most preferred international expansion options for several retailers, apparel players and consumer electronic chains, but Costco has shown no significant interest in the market. The reason behind the warehouse retailer’s lack of interest in China is that foreign retailers have struggled to adapt themselves to the Chinese market. Retail giant Wal-Mart (NYSE:WMT), home improvement retailer Home Depot (NYSE:HD) and electronics chain Best Buy (NYSE:BBY) have had a hard time selling their products to discerning Chinese shoppers.

Costco’s CEO believes that the company does not need to focus on China at the moment since its operations in other Asian countries are going very well. At the moment, there appears no lack of growth for the company in domestic as well as international markets, which is why it has set China aside for later. It seems that Costco does not want to enter a market that hasn’t done much good for U.S. retailers so far.

Last year, there was a report in The Southern Metropolis Daily (a Chinese Newspaper based in Guangzhou) that Costco is looking for a local partner to launch e-commerce operations in China. While the report indicated that the company is finally looking to set its foot in China, launching only e-commerce websites might not be the best idea. Costco’s core value proposition isn’t limited to its low priced products, but also includes the shopping experience. While the company can offer cheaper products over the Internet, it cannot replicate the enticing store environment where shoppers have access to several ancillary services. With absence of those services, Costco may find it hard to make a strong first impression in the unforgiving Chinese retail market.

Our price estimate for Costco stands at $123, implying a premium of less than 5% to the market price.

See our complete analysis for Costco

The Chinese Retail Market Hasn’t Been Fruitful For U.S. Retailers

Chinese consumers are very cautious and their buying decisions aren’t always price driven. They are more inclined towards tailor-made products and a shopping environment that reflects local touch. Along with prices, Chinese buyers are concerned about authenticity and quality of products. Due to these factors, U.S. retailers entering the region haven’t been able to adapt themselves to the local environment, which has resulted in sluggish growth. Moreover, the Chinese retail market has a number of established local players who have outperformed their foreign counterparts with a better understanding of consumer behavior.

Despite offering lowest prices in the market, retail giant Wal-Mart hasn’t been able to attract customers. Chinese shoppers are accustomed to buying their groceries at local outdoor markets and Wal-Mart has been unable to customize its stores accordingly. On the other hand, its local counterpart, Sun-Art, has successfully recreated that environment with fishing tanks, in-store noodle stands, fresh seafood displayed on table tops, etc. One of the largest electronics retail chain in the U.S., Best Buy, has struggled in China due to its premium prices and tough competition from local electronics chains such as Suning and Gome. Best Buy opened stores in China that were similar in infrastructure to its U.S. stores, which provided a better shopping environment than Suning and Gome. However, this did not work in Best Buy’s favor since Chinese buyers are used to shopping for electronics in warehouse-style stores, which Suning and Gome have exploited to good effect. Best Buy’s store environment turned out alien to Chinese buyers and its products were perceived as expensive.

The Chinese retail market has been unrelenting to even slightly different retailing environments and Costco is a different retail concept altogether. While the warehouse retailer can offer good quality products at low prices, customer response to its store format cannot be predicted, which increases the risks involved in investing in China.

No Concrete Plans For China

In an interview last year, Costco CEO Craig Jelinek stated that the company doesn’t feel the need to enter China yet as its other Asian business is doing very well. He believes that there are a lot of opportunities available in countries such as Japan, Taiwan and Korea, and expanding in China might turn out to be a risky move. Jelinek stated that Costco does not want to stretch its business beyond the management’s control and China will be a good expansion option even after 10-15 years.

It appears that the company doesn’t feel the need to expand in China as it has no growth problems in the U.S. or its current international locations. We believe that once Costco runs out of growth room in the U.S., it will consider China as the next destination for store expansion. The company’s warehouse concept has gained significant traction in Taiwan, where consumer behavior is somewhat similar to China. Even with a small number of stores, Costco’s brand popularity in Taiwan has grown tremendously. We believe that a pleasing customer response in Taiwan is an indication that Costco can be successful in China as well, if the company decides to open its stores there.

Speculations Of E-Commerce Expansion

About a year back, there was a report in a Chinese newspaper that Costco is planning to expand its e-commerce operations in the country and is looking for a local partner. While the company hasn’t confirmed the news yet, we believe that Costco will look for e-commerce expansion in the region before opening its physical outlets. The idea behind this strategy is not to invest too much in a market that hasn’t been conducive for U.S. retailers and to explore China’s huge e-commerce space ($194 billion in 2012) before expanding its retail footprint.

However, an online store will lack Costco’s traditional store characteristics that have played a crucial role in its success. At Costco, shopping is not just about prices but the shopping experience as well, which includes a “treasure hunt” experience where shoppers walking around the isles always find something new. Also, they have access to several ancillary services such as food court, photo-center, pharmacy, gas station, etc.

With only online launch in China, Costco won’t we able to provide these social experiences. Even if the company alters between its brands in order to recreate the “treasure hunt” experience over the Internet, its ancillary services will be absent. A deep analysis of Costco’s sales in the U.S. suggests that while average spending per customer on merchandise has grown slowly over the past four-five years, their spending on ancillary services has increased at a hefty pace. Hence, by not providing these services in China from the outset, Costco’s first impression on buyers will not be too strong. This can make it difficult for the company to elevate its brand image in the future.

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Costco’s May Results Trump Estimates As Pent-Up Demand Fuels Retail Market Growth

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Friday, June 6th, 2014 by

The largest warehouse club in the U.S., Costco (NASDAQ:COST) recently reported its May 2014 sales results, which were much better than analysts’ expectations. The retailer’s comparable sales improved by 6% during the month, while the consensus estimate stood at 4.6%. In terms of geographies, Costco’s comparable sales grew 6% in the U.S. and 7% in international markets, excluding the impact of higher gas prices and unfavorable currency fluctuations. The retailer was able to beat street estimates for the third consecutive month due to its strong footing in the U.S. retail market and improving shopping trends.

During the early part of the year, industry-wide foot traffic in the U.S. was low as buyers shied away from store shopping due to extreme winter storms. However, as the weather improved, buyers returned to physical shopping, reflecting significant pent-up demand that boosted April and May sales growth. Costco is among the eight retailers tracked by Thompson Reuters that have heavy weighting in the latter’s retail sales index. Cumulatively, these retailers reported an increase of 4.6% in their May sales, while Thomson Reuters predicted the growth to be around 3%.

Our price estimate for Costco stands at $123, implying a premium of less than 5% to the market price.

See our complete analysis for Costco

Strong May Helped Costco, Tough June Might Also Be Favorable

After a slump in the first three months of 2014, sales trends in the U.S. ameliorated notably in April and continued to improve in May. The U.S. witnessed a harsh winter season this year, which kept many buyers away from stores. This resulted in significant pent-up demand that eventually uplifted retail sales growth in April. The group of retailers tracked by Thompson Reuters reported a 6.4% rise in sales during the month. According to consulting firm AlexPartners, a lot of pent-up demand was unmet even after strong sales in April, which helped retailers such as Costco realize strong sales in May.

While U.S. retailers enjoyed high demand during April and May, June is likely to be tough since many consumers will head out on summer vacations, which will have a negative impact on store traffic. Retailers will thus have a smaller audience to cater to and product pricing will become a crucial factor. This will create a conducive environment for Costco, giving it a competitive edge over peers.

Persistent Strong Performance Indicates Costco’s Supremacy

Costco’s comparable sales growth has been better than market expectations for three consecutive months now. In March, the retailer reported 5% growth in comparable sales while analysts were expecting the figure to be around 3.5%. Comparable sales in April grew by 5%, which was way ahead of the consensus estimate of 3.2%. Costco gained momentum in May as its same-store sales growth reached 6% with similar growth in the U.S. and 7% growth in international markets.

The retailer’s growth in the U.S. is being propelled by the rising member base, as U.S. buyers look for cost saving options amid a weak macro-economic environment. Costco has maintained a steady growth momentum even when economic conditions weren’t particularly conducive for the retail market. This indicates the warehouse retailer’s resilience against unfavorable headwinds. In international markets, Costco has found tremendous acceptance due to its unique shopping model that promotes cost savings. Over the past four years, the company’s international revenue, as well as comparable sales growth, have outpaced its domestic growth. We believe that the retail giant can sustain its growth momentum in international markets, going forward, as buyers in Canada and Mexico (its biggest international markets) continue to buy quality products at affordable prices, and the company expands in other lucrative regions such as Japan and Australia.

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Rising Membership Propels Costco’s Growth

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Friday, May 30th, 2014 by

Amid an uncertain retail environment, warehouse giant Costco (NASDAQ:COST) posted strong results with 6% growth in comparable sales and 3% rise in net income. While the company’s revenues topped estimates, its earnings per share fell short by a small margin. Costco’s earnings per share came in at $1.07, while analysts were expecting the figure to be around $1.09. Unfavorable foreign currency fluctuations had a negative impact of about $0.03 on the retailer’s EPS and 5 percentage points on its international comparable sales growth.

Excluding the impact of currency fluctuations and gasoline price deflation, Costco’s U.S. same-store sales increased by 6% and international same-store sales increased by 8%. Increasing membership signups, rising membership fees and improving renewal rates boosted Costco’s results, and we expect this trend to continue in the future as well. The retailer recently opened its first store in Spain, where it hasinteresting growth opportunities. Costco’s online sales continued to grow at a robust pace in all its markets, which is a promising sign for the company. Overall, Costco appears to be headed towards a bright future.

Our price estimate for Costco stands at $121, implying a premium of less than 5% to the market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Costco

Growing Membership Is Driving Costco

Over the last few years, Costco has seen a noticeable increase in the number of new members. While the retailer added 2.3 million members in fiscal 2009, more than 4 million customers signed up in fiscal 2011. The retailer’s membership base saw a rise of 3 million in fiscal 2012 and another 4.2 million joined Costco in fiscal 2013. Strong membership growth continued in fiscal 2014 as well, which is evident from strong third quarter data. New membership signups increased by 1% during the quarter with the addition of 1.2 million cards. The business member renewal rate improved to 94.4% in Q3 from 94.3% in Q2 and the Gold star renewal rate moved up to 89.7% from 89.6% in the previous quarter. Overall, renewal rate in the U.S. and Canada reached 90.6% from 90.4% (Q2) and in international markets, it soared from 86.8% in Q2 to 87.3% at the end of Q3.

Executive members play an important role in driving Costco’s sales as they represent one-third of Costco’s overall customers and two-third of its revenues. These members pay $110 as membership fee (as opposed to $55 paid by other members) to get 2% (maximum of $750) annual rewards on their purchases. Interestingly, the proportion of executive members in the overall membership base has been rising historically. During the quarter, over 300,000 new executive members joined Costco with total membership signups at 1.2 million. The proportion of new executive members in total new members was somewhat in line with historic averages.

International Markets Present Several Growth Opportunities

As evident from its robust growth, Costco’s business model appears to be resonating well with international customers. Encouraged by the pleasing customer response, the company has been gradually expanding in key international markets such as the U.K., Mexico and Canada. During the third quarter, Costco opened one store each in Japan and Korea,as well as  its first store in Spain. Given the region’s weak economic environment, buyers are likely to welcome a money saving shopping option in the form of Costco. With the right marketing and an optimum emphasis on essentials such as groceries (high demand in Spain), the retailer can acquire a strong customer base. Since Costco has a very small presence in Europe, a successful launch in Spain can facilitate its expansion in a number of markets. Moreover, the company operates just 173 stores in seven countries, out of which 120 are in Canada and Mexico. This presents strong growth opportunities in Japan, Taiwan, Korea, Australia etc.

Online Growth Continues

During the third quarter, Costco’s online business continued to grow at a robust pace backed by its website re-platforming, several new mobile apps, and the launch of new product categories. Following 20% growth during the second quarter of fiscal 2014, the retailer’s e-commerce revenue rose by 15% in Q3 fiscal 2014. We believe that this growth is likely to continue in the future as Costco’s online channel is at a nascent stage and accounts for just 2.5% of its net sales. Furthermore, the company’s e-commerce strategy, increased product categories and better inventory management will assist its online growth. About 80%-90% of products offered on Costco’s website are different from its store inventory. This prevents self-cannibalization between these two channels. Over the last year, Costco has added new product categories such as apparel, health and beauty aid. The retailer has also improved its shipment timings by shipping three depots instead of one. Costco currently operates its e-commerce operations in three international geographies – Canada, the U.K. and Mexico. As the company enters new markets such as Japan, Australia, Korea etc. in the future, its online business will get bigger.

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Costco Likely To Report Strong Results Following Three Quarters Of Earnings Miss

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Wednesday, May 28th, 2014 by

Leading U.S. warehouse club Costco (NASDAQ:COST) is scheduled to report its Q3 fiscal 2014 results on May 29. Based on its March and April sales results, which easily trumped consensus estimates, we expect the company to report strong quarterly growth. Following a weak holiday quarter, the retailer’s comparable sales increased by 5% in March and April backed by an increase in membership base in the U.S. and strong sales in International markets. Although the retailer’s EPS had missed market expectations in the last three quarters, it is likely to be in line with the estimates this time around.

Driven by the weak economic environment, U.S. buyers in numbers have switched to Costco to take advantage of its attractive bargains. This has translated into significant improvement in new membership signups and renewal rates, which have subsequently boosted comparable sales growth in the U.S. In international markets, Costco has found tremendous acceptance due to its cost-saving shopping model. As a result, the company’s international revenue and comparable sales growth, have outpaced its domestic growth for four consecutive years.

In the last quarter, Costco was behind analysts’ estimates in terms of earnings per share by almost 12 cents per share due to disappointing holiday sales, low gross margins in fresh foods and unfavorable currency fluctuations. However, with strong revenue growth and better gross margins in Q3, the company is expected to report an EPS of $1.09, which is in line with consensus estimates. We will look for additional details related to Costco’s underlying performance and future strategies during the earnings call.

Our price estimate for Costco stands at $121, implying a premium of less than 5% to the market price.

See our complete analysis for Costco

Attractive Bargains And Improving Market Conditions Helped Costco

The warehouse club industry sales have grown at a higher rate than general merchandise store sales over the last decade. Some consumer reports suggest that buyers can save up to 55% while shopping at warehouse clubs. Costco is the largest retailer in this industry which places it at an advantageous position. As a warehouse retailer, Costco offers products at lower prices than its competitors. It does so by keeping the product markups low at 15% while most supermarkets and department stores markup their goods by more than 25%. Also, it changes the brands it offers regularly, and therefore, customers always find something new at its stores and get a ‘treasure hunt’ experience. To add more appeal, the retailer from time-to-time offers high-end products such as Coach (NYSE:COH) purses and Dom Perignon champagne. Costco is also focused on serving its customers based on the local tastes and demand. It grants its local store managers some discretion over the products that are kept in stores, which enables it to keep sufficient inventory of products with high selling frequency. With its enticing bargains, Costco is able to attract customers even when consumer confidence isn’t at its best. In fact, weak economic environment often drives customers to Costco and they continue shopping there even when the market conditions improve.

Lately, the U.S. retail market has started to recover with renewed consumer confidence and better economic data. Consumer confidence index in the U.S. reached 100 in the first quarter, propelled by better employment data, and rising equity and home prices. Applications for unemployment benefits dropped to their lowest level in more than three months in early March and average job growth in February and March (195,000) was much better than what it was in the prior two months. In fact, first time jobless benefits applications in early April were at their pre-rescession levels. With improved consumer confidence, retail sales in February improved marginally by 0.7%, followed by 1.1% jump in March, which was their biggest gain in over 18 months. U.S. buyers were less reluctant to spend on furniture, clothing, general merchandise, health and personal care, food and beverage, sporting goods etc. which helped Costco’s results. Interestingly, while retail market growth slowed down to 0.1% in April, Costco sustained its growth momentum exhibiting tremendous resilience to market fluctuations.

Growing Acceptance Is Driving International Growth

Over the past four years, while Costco’s revenues in the U.S. have grown at an average annual rate of 5%, its international revenues have increased by almost 15% annually. It appears that consumers in international markets are welcoming the retailer’s business model, which promotes cost saving. In fact, early signups in Asia and Australia have been very strong, which is encouraging Costco to continue its expansion in these regions. Most of Costco’s growth is coming from its biggest international market – Mexico, where the recent economic slowdown hasn’t troubled the retailer. In constant currency terms, Costco’s international comparable sales increased by almost 7% during April 2014, following 9% growth in the prior month. Such robust and consistent growth indicates that the company is gaining momentum in key international markets. During March 2014, Costco’s international results benefited from heavy store traffic and increased value-per-transaction in Japan. Since sales taxes were set to rise in the country from April 1, Japanese buyers bought more during March. However, since the retailer operates less than 20 stores in the country out of its 173 international stores, Japanese buyers’ reluctance in spending in April didn’t have a big impact on Costco’s growth.

While the company’s growth in local currency is quite pleasing, unfavorable currency fluctuations have had a negative impact. After factoring in the exchange rate fluctuations, Costco’s international comparable sales growth comes crashing down to 4% in March and 2% in April. This is likely to be a drag on the company’s Q3 fiscal 2014 earnings per share.

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Costco’s Growth Beats Estimates Second Month In A Row

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Tuesday, May 13th, 2014 by

Leading U.S. warehouse club Costco (NASDAQ:COST) recently reported its April sales, witnessing sustained revenue and comparable sales growth globally. Net sales increased by 7% during the month to $8.56 billion and comparable sales grew by 5%, which was way ahead of the consensus estimate of 3.2%. April marked the second consecutive month where the retailer’s growth was much better than consensus estimates. In March, Costco reported 5% growth in comparable sales while analysts were expecting the figure to be around 3.5%. These results indicate that the retailer has regained its growth momentum after February, when its comparable sales rose by just 3% on account of bad weather conditions that prevented store visits. What’s pleasing to see is that Costco was able to deliver good results against a tough comparable period of April 2013. Moreover, its international results were particularly good during the month, which indicates that its business model is prospering in international markets.

Our price estimate for Costco stands at $121, implying a premium of less than 5% to the market price.

See our complete analysis for Costco

Costco Maintains Its Consistency In The U.S.

During April 2014, Costco’s comparable sales in the U.S. increased by a healthy 5% excluding the impact of higher gasoline prices. While the growth is promising in itself, it looks even more pleasing considering that April 2014 had one less selling day due to the shift in timing of Easter. The company stated that the calender shift had a negative impact of 1-1.5 percentage points on its revenues as well as comparable sales. Excluding this impact, Costco’s comparable sales growth was in the range of 6%-6.5%.

Robust growth in March and April indicates that Q3 fiscal 2014 will be much better for the company as compared to the second quarter, when it wasn’t able to match market expectations in terms of profits. Moreover, considering that Costco realized 6% comparable sales growth (U.S.) in the comparable period (i.e. April 2013), the underlying performance looks even better. The company’s growth is being propelled by the rising member base, as U.S. buyers look for cost saving options amid a weak macro-economic environment.

International Results Keep Getting Better

In constant currency terms, Costco’s international comparable sales increased by almost 7% during April 2014, following 9% growth in the prior month. Such robust and consistent growth indicates that the company is gaining momentum in key international markets. Interestingly, this growth was on top of 6% comparable sales growth witnessed in the same month last year. Due to its unique shopping model that promotes cost savings, Costco has found tremendous acceptance in international markets such as Mexico, Canada, Japan, etc. Over the past four years, the company’s international revenue, as well as comparable sales growth, have outpaced its domestic growth.

During March 2014, Costco’s international results benefited from heavy store traffic and increased value-per-transaction in Japan. Since sales taxes were set to rise in the country from April 1, Japanese buyers bought more during March. However, since the retailer operates less than 20 stores in the country out of its 173 international stores, Japanese buyers’ reluctance in spending in April didn’t have a big impact on Costco’s growth. We believe that the retail giant can sustain its international comparable sales growth, going forward, as buyers in Canada and Mexico (its biggest international markets) continue to buy quality products at affordable prices at its stores.

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Costco’s Magnificent March

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Friday, April 11th, 2014 by

Leading U.S. warehouse club Costco (NASDAQ:COST) recently reported its March sales, witnessing sustained revenue and comparable sales growth globally. Net sales increased by 8% during the month to $10.43 billion and comparable sales grew by 5%, which was way ahead of the consensus estimate of 3.5%. Excluding the impact of foreign currency fluctuations and gasoline deflation, Costco’s comparable sales increased by 7%. The retailer’s growth has picked up after February, when its comparable sales rose by just 3% on account of bad weather conditions that prevented store visits. What’s pleasing to see is that Costco was able to deliver good results against a tough comparable period of March 2013. Moreover, its international results were particularly good during the month, which indicates that its business model is prospering in international markets.

Our price estimate for Costco stands at $121, implying a premium of less than 10% to the market price.

See our complete analysis for Costco

U.S. Results Were Good

During March 2014, Costco’s comparable sales in the U.S. increased by a healthy 6% excluding the impact of lower gasoline pricing. While the growth looks pleasing, the extra day in March 2014 and shift in timing of Easter also had parts to play in the company’s results. The company stated that the calender shift had a positive impact of 1-1.5 percentage points on its revenues as well as comparable sales. Excluding the extra day, Costco’s comparable sales growth was in the range of 4.5%-5%, which is still much better than what the market expected.

This comes as good news for the company as it wasn’t able to match market’s expectations in terms of profits in Q2 fiscal 2014 that ended in February. Moreover, considering that Costco realized 6% comparable sales growth (U.S.) in the comparable period (i.e. March 2013), the underlying performance looks good. The company’s growth is being propelled by the rising member base, as U.S. buyers look for cost saving options amid a weak macro-economic environment.

International Results Continue To Please

In constant currency terms, Costco’s international comparable sales increased by almost 9% during March 2014, indicating that the company is gaining momentum in key international markets. Interestingly, this growth was on top of 7% comparable sales growth witnessed in the same month last year. Due to its unique shopping model that promotes cost savings, Costco has found tremendous acceptance in international markets such as Mexico, Canada, Japan, etc. Over the past four years, the company’s international revenue, as well as comparable sales growth, have outpaced its domestic growth.

During the month, Costco’s international results benefited from heavy store traffic and increased value-per -ransactions in Japan. Since sales taxes were set to rise in the country from April 1, Japanese buyers bought more during March. This boosted sales of several retailers including Costco. However, the retailer operates less than 20 stores in the country out of its 173 international stores, which suggests most of its growth came from other regions. We believe that Costco can sustain its international comparable sales growth, going forward, as buyers in Canada and Mexico (its biggest international markets) continue to buy quality products at affordable prices at its stores.

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Here’s Why We Believe That Costco Is Fairly Valued At $121

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Friday, April 4th, 2014 by

Largest warehouse club in the U.S., Costco (NASDAQ:COST), has grown at a steady pace over the past several years irrespective of the state of the economy. While most retailers have struggled to attract customers due to low consumer confidence lately, Costco has had no problems in driving store traffic. With its unwavering financial performance, the retailer’s stock has been somewhat stable, rising only 5% over the last year. However, we believe that there is still some value to be unlocked in the company and our price estimate for Costco at $121 is about 10% premium to the current market price.

The retailer can maintain a steady growth momentum in the U.S. going forward, due to increasing adoption of warehouse shopping and Costco’s appealing bargains. Historically, Costco’s international growth has exceed its domestic growth by a long margin, which is likely to continue in the future with the retailer’s persistent expansion in lucrative markets. Another bankable factor that is likely to add significant value to Costco in the long run is its growing e-commerce channel. However, rising competition from Wal-Mart‘s (NYSE:WMT) warehouse model Sam’s Club and online giant Amazon (NASDAQ:AMZN) pose some serious threats for the company. While Amazon’s rapid growth and showrooming are causes for worry to a number of retailers, including Costco, Sam’s Club’s lower membership fee and wider customer reach can hurt the warehouse giant.

See our complete analysis for Costco

Strong Industry Growth & Costco’s Core Value Propositions

A warehouse retailer charges an annual membership fee to its customers and provides a wide variety of merchandise at discounted prices. The U.S. warehouse club industry comprises of three main players – Costco, Wal-Mart’s Sam’s Club and BJ’s Wholesale Club – with Costco being the strongest of the lot. Some consumer reports suggest that buyers can save up to 55% while shopping at warehouse clubs. Due to these bargains, the warehouse club industry sales have grown at a higher rate than general merchandise store sales over the last decade. Costco’s annual comparable store sales growth has averaged around 6% for the past three years, thanks to new membership signups. We do not expect any significant slowdown in the industry growth in the future as pricing benefit is something that buyers will always welcome, as long as they are offered good quality products.

As a warehouse retailer, Costco offers products at lower prices than its competitors. It does so by keeping the product markups low at 15% while most supermarkets and department stores markup their goods by more than 25%. The retailer displays its products in simple boxes and shelves on concrete floors to keep the costs to minimum. Also, it changes the brands it offers regularly, and therefore, customers always find something new at its stores and get a ‘treasure hunt’ experience. To add more appeal, the retailer from time-to-time offers high-end products such as Coach (NYSE:COH) purses and Dom Perignon champagne. Costco is also focused on serving its customers based on the local tastes and demand. It grants its local store managers some discretion over the products that are kept in stores. For instance, demand for salsa is highest in the Southwest region, as compared to other U.S. markets.

Several Opportunities In International Markets

Over the past four years, while Costco’s revenues in the U.S. have grown at an average annual rate of 5%, its international revenues have increased by almost 15% annually. It appears that consumers in international markets are welcoming the retailer’s business model, which promotes cost saving. In fact, early signups in Asia and Australia have been very strong, which is encouraging Costco to continue its expansion in these regions. The company opened two stores in Australia in the first quarter and plans to add another two by the end of fiscal 2014. Also, Costco will open two locations in Japan and Korea during the next six months. Currently, the company operates just 173 stores in seven countries, out of which 120 are in Canada and Mexico. Therefore, Costco has a strong opportunity to increase its reach in Japan, Taiwan, Korea, Australia and the U.K, and also enter other lucrative markets. In Mexico, the retailer has enough room for growth, despite the recent economic slowdown. [Read: Costco Has Room For Growth In Mexico]

This spring, the company will be opening its first store in Spain, where the prevailing economic weakness can work in its favor. We believe that given the right marketing, Costco can acquire a strong customer base in the region by offering cost saving options. Demand for essential items such as groceries in Spain is quite strong despite the overall retail weakness. This should assist the retailer’s growth since it generates more than half of its revenues from groceries.

Growing Online Business

Over the past several quarters, Costco’s online business has grown at a robust pace, backed by its website re-platforming, several new mobile apps and the launch of new product categories. Following 24% growth during the first quarter of fiscal 2014, the retailer’s e-commerce revenue rose by 20% in Q2 fiscal 2014. We believe that this growth is likely to continue in the future as Costco’s online channel is at a nascent stage and accounts for just 2.5% of its net sales. Furthermore, the company’s e-commerce strategy, increased product categories and better inventory management will assist its online growth. About 80%-90% of products offered on Costco’s website are different from its store inventory. This prevents self-cannibalization between these two channels. Over the last year, Costco has added new product categories such as apparel, health and beauty aid. The retailer has also improved its delivery times by shipping from three depots instead of one. Costco currently operates its e-commerce operations in three international geographies – Canada, the U.K. and Mexico. As the company enters new markets such as Japan, Australia, Korea etc. in the future, its online business will get bigger and start making material contribution to its sales.

Key Risks To Consider – Sam’s Club & Amazon

Although Costco is the leading warehouse retailer in the U.S., it faces stiff competition from its closest competitor, Sam’s Club. While Costco has a larger customer base, there are some factors that make Sam’s Club a more attractive choice for customers, thus making it a potential threat for the warehouse giant. Compared to an annual membership fee of $55 at Costco, Sam’s Club charges only $40 from its members. While an executive member at Costco pays $110 per year, Sam’s Club’s plus members pay only $100. It appears that Sam’s Club has a clear competitive advantage in terms of membership fee. Costco operates 450 stores in 40 states of the U.S. and Puerto Rico, with high concentration around California. The retailer earns about 24% of its domestic revenues from the region. On the other hand, Sam’s club is evenly spread across the U.S. with over 630 stores in 47 states and Puerto Rico. Additionally, Sam’s Club is the only warehouse club that offers Apple (NASDAQ:AAPL) products, which gives it a slight edge over Costco. Sam’s Club also provides excellent services for delivery, installation and technical support. When it comes to groceries, which is the largest product category sold by both warehouse retailers, Sam’s Club is found to be cheaper than Costco.

In case of Amazon, showrooming (a phenomenon where shoppers visit physical stores to find products, compare their prices on different websites and buy them cheaper online) is the biggest threat for Costco. Amazon offers and promotes free mobile apps to encourage its customers to compare prices of various products while walking in different stores. According to a survey conducted by a Seattle based startup Placed, apart from retailers such as Target (NYSE:TGT), Best Buy (NYSE:BBY) and Bed Bath & Beyond (NASDAQ:BBBY), showrooming can also impact the warehouse giant Costco. This study included the response of 15,000 customers as well as their movement analysis through the physical world. According to the study, about 45% of Amazon’s prime customers (who pay $79/year for free two-day shipping) will more likely shop at Costco than an average shopper. Moreover, there is 38% more chance for Amazon’s showroomers to visit Costco as compared to other showroomers. This indicates a big overlap between Amazon’s and Costco’s customers, which could be problematic for Costco. Considering the rapid growth of Amazon’s product categories, showrooming becomes an even greater threat. The company has demonstrated the ability to quickly grow its product portfolio, modify it to remain in line with Costco’s products and deliver merchandise within two days. Amazon offers a compelling range of consumer electronics and jewelry items – categories which have been important for Costco’s growth. In addition, Amazon is also taking on Costco in the grocery space with its local grocery-delivery service known as AmazonFresh.

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