How Will Costco’s International Business Perform Going Forward?
Costco‘s (NASDAQ:COST) organic performance has been keeping pace with the U.S. retail industry, in large part due to its business model. In fact, Costco was able to attract comparable sales growth of 10% in the fiscal first quarter in the U.S., even after it raised membership fees on June 1. To add to that, Costco’s comparable sales in the international market also grew 11% in Canada and 10% in the other international markets in Q1 2018. As of now, the retailer operates almost 30% of its total warehouses in international markets, which includes Canada, Mexico, U.K, Japan, Korea, Taiwan and Spain. The company also added two new markets – France and Iceland – in fiscal 2017 (year ended September).
Costco’s international segment contributes close to 23% of the company’s total revenues and accounts for 22% of its value, per Trefis estimates. Going forward, we expect this segment to become Costco’s fastest-growing segment and reach nearly $36 billion in revenues by 2020, up from a $30 billion forecast for full-year 2017. We expect the company’s international revenues to increase at CAGR of 6.6% in the next three years, whereas the other segments are likely expected to increase at a 4% CAGR over the same time frame.
Growing Sales In The Canadian Market
The growth in the Canadian market can be partly attributed to the appreciation of the Canadian dollar relative to the U.S. dollar. The retailer boasts more than 10 million Costco members in Canada with a renewal rate of 90%, which helps the company earn significantly just through its membership fees. Costco operates 94 stores in Canada (as of Nov 2017), which is its greatest number of stores in any market outside of the U.S. In fiscal 2017, the company’s comparable sales grew 5% in Canada, while its total comparable sale grew 4%. We expect the company to continue to benefit from its Canadian operations in the near term as well.
Potential Expansion in China
Costco launched its official flagship store on the Tmall platform in China, which includes an assortment of furniture, consumer electronics, and wine. The launch came three years after the company first began selling in China, using dedicated cross-border e-commerce channel Tmall Global. Going forward, the retailer plans to build warehouses in China for the first time based on the recent launch. Although the company has not commented on this development, analysts believe that the retailer’s first physical location in China could happen within the next year or two.
China is estimated to be the second largest market (behind the U.S.) in total consumer spending for 2017, while its retail spending growth is expected to be far in excess of the global average over the next five years, given its huge population and growth in income due to urbanization. China signifies an important growth opportunity for Costco as it will help the company balance its dependence on North America. In addition, Costco’s expansion in the Chinese market could further add to its membership income. In fiscal 2017, the company managed to grow its membership base to $90 million. This growth came at a slower y-o-y rate, largely due to the hike in the membership fees. However, we expect Costco’s membership rate to improve going forward, primarily driven by its international expansion plans.
Our $185 price estimate for Costco’s stock is slightly below the current market price.
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