Falling Gas Prices Pummel Costco’s Otherwise Strong Growth In January

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Costco‘s (NASDAQ:COST) growth is highly susceptible to gasoline prices and foreign currency fluctuations, which has been confirmed by its January sales results. For the four week period ended February 1, the company reported flat comparable sales growth (including the impact of falling gasoline prices and foreign exchange fluctuations), while analysts were expecting 1.2% rise in this metric. In the U.S., weighed down by the impact of gasoline prices, Costco’s comparable sales grew by just 2%, while international comparable sales fell 4% due to negative currency headwinds. [1]

Excluding their impact, Costco reported familiar growth figures in-line with its performance over the past numerous months. Its comparable sales in the U.S. and abroad increased 7% and 6%, respectively, and overall comparable sales increased 7%. The company’s results were helped by the ongoing improvement in the U.S. job market, as well as its core value propositions that provide customers enough incentives to pay the membership fee. What’s most impressive is that Costco managed healthy growth in comparable sales and 2% rise in revenues, while the overall U.S. retail industry under-performed.

Our price estimate for Costco stands at $130, implying a discount of about 5% to the current market price.

See our complete analysis for Costco


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The U.S. retail market grew just 0.2% in January, according to data compiled by the United States Census Bureau. [2] Such slow growth is surprising, considering that U.S. buyers are saving a lot of money these days due to lower fuel costs. It appears that they are just not ready to spend it elsewhere, or at-least not at places that are reflected in overall retail sales. Another reason can be that buyers have gone easy on shopping after spending relatively more during the holiday season.

However, none of that appears to be troubling Costco, which reported 7% growth in its January comparable sales in the U.S. Costco is the largest warehouse retailer in the U.S. in terms of revenues, and has seen consistent growth in the number of members over the past several years. Some reports have indicated that buyers can save up to 55% while shopping at warehouse clubs, and Costco has been the most preferred destination for buyers, thanks to its exceptional product quality and engaging shopping experience.

During January, a factor that would have helped Costco’s membership growth and subsequently, its sales is the fall in unemployment rate. The U.S. jobless rate fell to 5.7% in January 2015 from 6.6% in the year ago period. [3] With fewer unemployed individuals, more people would have been able to afford Costco’s membership, which helped its growth during the month. However, gasoline prices were significantly lower in January this year as compared to the same month last year, which although improved consumer affordability, narrowed Costco’s comparable sales growth to 2%. Nevertheless, the warehouse giant’s comparable sales growth, excluding the impact of gasoline deflation, is the true indicator of its supremacy in the U.S. market. Therefore, we believe that apart from gasoline price deflation, other macro-economic factors will not slow down Costco’s growth.

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Notes:
  1. Costco Wholesale Corporation Reports January Sales Results, Costco, Feb 4 2015 []
  2. Retail (excl vehicle and auto parts dealers, United States Census Bureau []
  3. Unemployment rate, Bureau of Labor Statistics []