Costco’s Growth Beats Estimates Second Month In A Row

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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%. [1] 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%. [2] 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. [3] 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

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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. [2] 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. [4] 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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Notes:
  1. Costco Wholesale Corporation Reports April Sales Results, Costco, May 8 2014 []
  2. Costco Wholesale Corporation Reports March Sales Results, Costco, Apr 10 2014 [] []
  3. Costco Wholesale Corporation Reports Second Quarter and Year-to-Date Operating Results for Fiscal 2014 and February Sales Results, Costco, Mar 6 2014 []
  4. Costco March same-store sales beat estimates, Reuters, Apr 10 2014 []