Costco Sustains Its Growth Momentum In June
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. [1] 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. [2] 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.
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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. [3] 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. [4] 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. [5] [6]
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. [7] 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. [8] 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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Notes:- Costco Wholesale Corporation Reports June Sales Results, Costco, Jul 10 2014 [↩]
- U.S. Retail Sales Fell In June From May – Redbook, 4-Traders, Jul 8 2014 [↩]
- Costco Wholesale Corporation Reports June Sales Results, Costco, Jul 11 2013 [↩]
- Costco’s SEC filings [↩]
- Costco Q3 fiscal 2014 earnings transcript, May 29 2014 [↩]
- Costco’s Q3 fiscal 2013 earnings transcript, May 30 2013 [↩]
- Best Warehouse Store: BJ’s, Costco or Sam’s Club?, Yahoo Finance, Jan 6 2013 [↩]
- Costco’s Unorthodox Strategy To survive The Big Box Apocalypse, Business Insider, Mar 7 2013 [↩]