Strong US Macros Signal Good Times For Costco, As Store Expansion To Further Boost Growth

-10.42%
Downside
729
Market
653
Trefis
COST: Costco logo
COST
Costco

For the most part of 2015, retailers in the U.S. did not have a lot going in their favor. While domestic sales growth had slowed considerably, international revenues, which were relatively stronger, were hit by currency fluctuations. Lower gas prices meant that consumers had more disposable income at hand. However, there is generally somewhat of a lag between falling gas prices and any impact on spending, which was evident from weak sales growth at leading retailers. For example, Costco (NYSE:COST) grew its annual revenues only by 3% in fiscal 2015, compared to an average of over 8% in the previous three years.

The tide seems to be turning, however, as seen from an improvement in macros in the U.S. With a pickup in the job market and a decrease in the  unemployment rate to 5.0%, consumer spending is likely to improve in the short term. Moreover, Costco’s plans to expand its store base in the U.S. will help the company grow its top line at a much faster rate. Below, in this article, we will take a closer look at both trends,  i.e., improving U.S. macro-economic conditions as well as Costco’s expansion plans.

Our price estimate for Costco stands at $141, about 10% below the current market price.

Relevant Articles
  1. Does Costco Stock Have More Room For Gains After Rising 40% in 2023?
  2. What To Expect From Costco’s Stock Post Q4 Results?
  3. Costco’s Stock Up 23% So Far, What’s Next?
  4. What To Watch For In Costco’s Stock Post Q3?
  5. What’s Next for Costco Stock?
  6. Company Of The Day: Costco

See our complete analysis for Costco

Strong U.S. Macros Will Drive Comps Growth

The unemployment rate in the U.S. reached a 5-year low in October at 5%, compared to an average of about 5.3%, in the preceding 9 months this year ((U.S. Unemployment Rate, Trading Economics)). While unemployment has been on a steady decline throughout 2015, higher-than-expected  job growth [1] provided confirming evidence that the U.S. economy is indeed recovering. While a substantial increase in consumer spending might still be some time away, retail sales trends already show some improvement.

US Sales

After falling to levels of about 1% earlier in April, retail sales have picked up pace lately, with growth clocking 2.4% in September. More importantly, comps growth at Costco has also been stronger in the last two months (September and October) at 3% and 2%, respectively [2]. Going forward, we expect growth to further accelerate driven by improving consumer confidence. For instance, a consumer who is more confident about the economy, and therefore one’s income growth, is more likely to spend the spare income generated from low gas prices on purchases rather than saving it. For Costco, this shift in behavior will reflect in the form of a higher revenue per square foot, which currently stands at $1,000.

Store Expansion Will Further Boost Revenues

At the end of September, Costco had a total of 480 stores in the U.S. In the coming twelve months, the company plans to add another 18 stores within the country, which amounts to 4% growth in square footage. Even if the new stores manage to generate only 50% of what an average Costco store generates in revenue, the expansion alone will yield 2% growth in the company’s U.S. revenues. Considering that improved economic conditions make consumers relatively more confident, Costco is likely to benefit from a faster pick up in sales at its new stores.

Per our current estimates, the number of Costco’s warehouse clubs in the U.S. is expected to increase to about 560 stores by the end of our forecast period. Simultaneously, revenue per square foot is also expected to grow from the current level of $1,000 per store to about $1,100 per store by the end of Trefis forecast period. Any further growth in these metrics will result in a higher valuation for Costco, as can be demonstrated by manipulating  our interactive widget below.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid CapMore Trefis Research

Notes:
  1. U.S. Non Farm Payrolls, Trading Economics []
  2. Costco News Releases []