Costco (COST) Looks Sound On Robust Comps, Growth Endeavors

A glimpse at Costco Wholesale Corporation (NASDAQ:COST) share price movement reveals that it has surged 16.7% in a year compared with the industry’s growth of 13.9%. This clearly indicates that the stock with long-term earnings per share growth rate of 9.1% looks quite disciplined in its approach to adapt to the changing retail landscape.

In fact, major chains are grappling with sluggish store and mall traffic as consumers choose to shop online. But Costco’s growth strategies and sturdy comparable-store sales (comps) performance have a different story to tell.

Dominant Warehouse Retailer

We believe that Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. In fact, the company’s strategy to sell products at heavily discounted prices has helped it to remain on growth track as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities.

Additionally, a differentiated product range enables Costco to provide an upscale shopping experience for its members, thereby resulting in market share gains and higher sales per square foot. It is also gradually expanding e-commerce capabilities in the United States, Canada, UK, Mexico, Korea and Taiwan. Consequently, comparable e-commerce sales for December surged 33.3%.

Positive Comps Performance Continues

Costco continued with positive comparable-store sales (comps) performance driven by improved store traffic and average transaction size. Comps for December increased 11.5%, following an increase of 10.8% in November, 7.5% in October, 8.9% in September, 7.3% in August, 6.2% in July, 6% in June, 4.1% in May, 3% in April, 6% in March, 4% in February and 7% in January. Notably, net sales increased 14.3%, 13.2%, 10.1%, 12.1%, 10%, 8.8%, 7%, 7%, 5%, 9%, 8% and 9% in December, November, October, September, August, July, June, May, April, March, February and January, respectively.

Enhancing Global Footprint

We are encouraged by the company’s expansion strategy. Evidently, Costco has one of the highest square footage growth in the industry and remains committed toward opening new clubs in domestic and international markets. In sync with this, it opened 23, 29 and 26 net new outlets in fiscal 2015, 2016 and 2017, respectively, and plans to open nearly 20 to 25 warehouses in fiscal 2018. In our view, the company’s diversification strategy is a natural hedge against risks that may arise in specific markets.

Deterrents to Overcome

Stiff competition and cautious consumer spending remain major threats. Investors also remain concerned about contraction in gross margin. Gross margin contracted 33 basis points during the first quarter of fiscal 2018, after shrinking 15 basis points in the final quarter of fiscal 2017. Management expects incremental costs related to new centralized return facilities may hurt margins in the next two quarters.

Costco carries a Zacks Rank #3 (Hold).

Key Picks

G-III Apparel Group, Ltd. (NASDAQ:GIII) delivered an average positive earnings surprise of 6.1% in the trailing four quarters. It has a long-term earnings growth rate of 15% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ross Stores, Inc. (NASDAQ:ROST) delivered an average positive earnings surprise of 5.5% in the trailing four quarters. It has a long-term earnings growth rate of 10% and a Zacks Rank #2 (Buy).

Dollar Tree, Inc. (NASDAQ:DLTR) has a Zacks Rank #2 and an impressive long-term earnings growth rate of 13.1%.

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