Costco Sustains Sales Momentum - Analyst Blog

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted healthy sales data for the four-week period ended November 28, 2010.

The company sustained its sales momentum. After a 6% increase in October 2010, Costco's comparable-store sales for November rose 9%, reflecting comparable sales growth of 7% at its U.S. locations and 13% at its international divisions. For the thirteen-week period ended, the company registered comparable-store sales growth of 7%, with U.S. and international sales improving 4% and 14%, respectively.

The sales results include contribution from the company's Mexico joint venture. Costco began incorporating results of its Mexico operations on a prospective basis with the commencement of its fiscal 2011 on August 30, 2010.

Excluding the effects of gasoline prices and a softer dollar, Costco's comparable-store sales for November climbed 6% with U.S. and international comparable sales increasing 6% and 8%, respectively. For the thirteen-week period ended, the company registered comparable-store sales growth of 5% with U.S. sales rising 3% and international sales climbing 10%.

Total net sales for November jumped 12% to $6.78 billion from $6.04 billion in the same month last year. For the thirteen-week period, sales increased 11% to $20.59 billion from $18.57 billion delivered in the same period last year.

Excluding the contribution from the company's Mexico joint venture, sales would have increased 9% and 8%, for the four and thirteen-week periods, respectively.

On a regional basis, Costco registered robust performance in Texas, Midwest, Los Angeles, and San Diego. On an international basis (in local currencies) healthy results were witnessed in Korea, Taiwan, Japan and Australia. 

Costco currently operates 582 warehouses, including 425 in the United States and Puerto Rico, 80 in Canada, 32 in Mexico, 22 in the United Kingdom, 9 in Japan, 7 in Korea, 6 in Taiwan and 1 in Australia.

Costco continues to be a dominant retail wholesaler based on its breadth and quality of merchandise. The company's strategy to sell products at heavily discounted prices has helped it to remain on a positive growth track under beleaguered economic conditions as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is strongly positioned in the warehouse club industry.

However, Costco faces stiff competition from BJ's Wholesale Club Inc. (BJ) and Sam's Club, a division of Wal-Mart Stores Inc. (WMT). These two rivals follow similar business models as they market high volumes of merchandise at low prices in a membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition, may depress sales and margins.

Currently, we have a Neutral rating on the stock. Moreover, Costco holds  a Zacks #3 Rank, which translates into a short-term ‘Hold' rating, correlating with our long-term recommendation.

 
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