What Conclusions Can Be Drawn From Costco’s Strong Comparable Sales In August?
Costco‘s (NASDAQ:COST) stock has increased slightly since it reported strong August sales last week. The retailer’s net sales grew 10% year-over-year (y-o-y) to $9.8 billion in August, and the company’s comparable sales increased a better-than-expected 7% in the same period. Costco’s comparable sales increased 7% in the U.S., 8% in Canada and 6% in other international markets. Interestingly, Costco’s overall comparable sales – excluding the impact of gasoline sales and foreign currency fluctuations – grew by 6%, driven by 6% growth in the U.S., 4% growth in Canada and a 7% rise in other international markets. This growth momentum confirms that the company is still able to grow traffic at its brick and mortar warehouses despite stiff competition in the grocery sector, and an overlap with Amazon (NASDAQ:AMZN since it purchased Whole Foods.
Rise In U.S. Comparable Sales
The biggest positive takeaway from the August report was the jump in Costco’s U.S. comparable sales. Also, Costco recently pushed through a membership fee increase to new members from June 1, when it increased its Gold Star membership by $5 per year to $60, and raised its Executive membership fee to $120 from $110. Further, the company also increased the maximum annual 2% reward associated with the Executive membership to $1,000 from $750.
Costco’s organic performance has been keeping pace with the U.S. retail industry, primarily due to its business model. For instance, Costco’s net sales in April increased 5%, similar to the U.S. retail y-o-y sales growth. This trend has sustained for the past four months, which reflects the core strength of Costco’s U.S. business. We expect the trend to continue in August as well (industry data not available yet).
Growing Sales In The Canadian Market
Costco reported strong comparable sales growth of 8% in Canada in August. This growth could be attributed to the appreciation of the Canadian dollar relative to the U.S. dollar in the same period. The retailer boasts more than 10 million Costco members in Canada with a renewal rate of 90%, which helps the company earn significant membership fees. Costco operates 95 stores in Canada, which is the greatest number of stores in any market outside of the U.S. In the nine months ended May 2017, the company’s revenues from Canada grew 7% y-o-y, with a 5% comparable sales growth in the same market.
Amazon-Whole Foods May Not Harm Costco
Amazon’s Whole Foods acquisition is expected to provide significant benefits to Amazon Prime members, including improved grocery delivery and online order pickup in stores. As a consequence, stocks of major grocery retail companies tanked. However, we expect Costco to be the least affected among most major grocery retailers, because Costco’s model works on thin margins and large volumes, and therefore the company is not keen on selling smaller quantities online. Given the fact that the company has been able to grow its revenues and comparable sales with this model without a strong focus on e-commerce suggests that Costco can withstand the Amazon-Whole Foods partnership as well going forward, at least in the near term. In fact, Costco is likely to generate revenues of more than $1500 per square foot in 2017, while the comparative number for Wal-Mart (NYSE:WMT) is less than one third of this number.
Currently, there is a significant overlap between Costco’s memberships and Amazon Prime Members. A Morgan Stanley survey based on 2,700 people revealed that 45% of Costco members also had a Prime membership. This indicates that Costco’s loyal customers still continue to visit its stores for their bulk purchases as these overlapped customers haven’t switched sides yet, and that both memberships can co-exist at the same time.
We have a $171 price estimate for Costco’s stock, which is slightly higher than the current market price. Based on our revenue and profit forecasts, our valuation for Costco currently stands at $76 billion. You can modify the interactive charts in this article to gauge the impact changes in individual drivers for Costco can have on our price estimates for the company.
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