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

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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. [1] The retailer’s comparable sales improved by 6% during the month, while the consensus estimate stood at 4.6%. [2] 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%. [3]

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

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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. [4] 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. [3]

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. [3] 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%. [5] Comparable sales in April grew by 5%, which was way ahead of the consensus estimate of 3.2%. [6] 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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Notes:
  1. Costco Wholesale Corporation Reports May Sales Results, Costco, Jun 5 2014 []
  2. Costco May same-store sales beat estimates on higher fuel prices, Reuters, Jun 5 2014 []
  3. Weather, Discounts Boost May Retail Sales, The Wall Street Journal, Jun 5 2014 [] [] []
  4. U.S. retailers beat sales expectations in May, Reuters, Jun 5 2014 []
  5. Costco Wholesale Corporation Reports March Sales Results, Costco, Apr 10 2014 []
  6. Costco Wholesale Corporation Reports April Sales Results, Costco, May 8 2014 []