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Costco Wholesale Corporation (COST): Should You Buy this Retailer?

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On Thursday, Costco Wholesale Corporation (NASDAQ:COST) came out with its third quarter results announcing net income for the quarter at $459 million, or $1.04 per diluted share, as compared to $386 million or $0.88 per diluted share last year. Costco operates as a wholesale club retailer, selling at lower margins as compared to its competitors and charging a membership fee in return. The quarterly results are an endorsement to the significant growth the company has experienced over the past few years by establishing itself as a unique brand in the membership club retail business.

Costco Wholesale Corporation (NASDAQ:COST)

Recent numbers

Beating analysts’ expectations, Costco Wholesale Corporation (NASDAQ:COST)’s net sales for the quarter increased 8% to $23.55 billion, up from $21.85 billion last year against an estimate of $24.23 billion. This comes predominantly from the growth in its membership base, and as a result its membership fee collections. Membership fees go up to $110 for executive members who get 2% of additional benefits as rewards, while standard members pay only $55. The company also recently announced a quarterly pay dividend of $0.31 per share, a jump from the previous quarter dividend of $0.28 per share which indicate its steady returns.

Higher gasoline prices and foreign currency fluctuations have had a negative impact on the company’s earnings. Excluding these effects, the company has grown at a rate of 7% over the quarter. Although the company has a price-to-earnings ratio of 25.07, which is substantially larger than its competitors, analysts have weighed in on the Costco Wholesale Corporation (NASDAQ:COST) shares and have increased their price target for the stock.

The growth in markets like Australia and Asia has been better than the growth in US. The company’s business model has been welcomed positively internationally. As part of its international expansion policy, four of the five stores opened in the third quarter were in the markets of Japan, Mexico and the U.K. International markets are currently the most promising ones for every retailer. Costco Wholesale Corporation (NASDAQ:COST) plans to add another six locations in the next quarter.


The closet peers to Costco Wholesale Corporation (NASDAQ:COST) are Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) Costco holds a significant position in retail, giving competition to the likes of Wal-Mart Stores, Inc. (NYSE:WMT) and managing to beat players like Target Corporation (NYSE:TGT) in terms of volume. Wal-Mart earned $3.78 billion, or $1.14 per share, in the first quarter, up from $3.74 billion, or $1.09 per share, a year earlier. Wal-Mart has been facing problems because of its diseconomies of scale, resulting in expensive goods and sending its customers fleeing to cheaper alternatives like Costco. The company’s current market is saturated and it is diversifying through e-commerce sales and operation in newer territories. Target, on the other hand, posted lower-than-estimated first quarter results and narrowed its annual outlook, citing soggy weather and higher taxes as the reason. Target earned $498 million, or $0.77 per share, which was down 40% from $697 million or $1.04 a share a year earlier. Costco presents the biggest threat to Target as its customers could buy the same goods at cheaper prices at Costco stores.

The future

What stands out about Costco is the fact that it has managed to grow and post better results in a turbulent economy that has affected its competitors severely. Costco has posted better-than-estimated results consistently, and its future strategies promise more of it. The company’s efficient use of resources and its strong negotiating power with vendors show in its cheaply-priced goods with margins as low as 15% over it cost. Because of which, Costco has seen a noticeable increase in its membership base when more than 4 million customers joined in 2011. The company says it plans to open more than 30 stores this fiscal year, highlighting its ambitious growth plans. Moreover, the apparel industry, which has been severely down and which majorly contributes to Wal-Mart’s and Target sales, forms a very small portion in Costco’s sales. Another positive, Costco has a surprisingly low cash conversion cycle where it manages to sell inventory even before it has to pay its vendors.

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