Costco Wholesale Corporation (COST): This Wholeseller Is Still a Good Investment

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The Costco Wholesale Corporation (NASDAQ:COST) is an international retailer that’s made a name for itself by selling bulk brands for low prices. It’s a one stop shop that sells everything from groceries to big screen TVs. Last quarter, the company beat analyst expectations by raising sales by 8% from $21.85 billion to $23.55 billion. With quarterly revenue and earnings growth of 7.90% and 18.90%, respectively, Costco has been successfully expanding. But what makes Costco Wholesale Corporation (NASDAQ:COST) special and can the company sustain its impressive growth?

Costco Wholesale Corporation (NASDAQ:COST)

Growing the club

Costco Wholesale Corporation (NASDAQ:COST) has opened 19 store locations during its current fiscal year most recently expanding in japan, Mexico, the U.K., and Maryland. It plans on adding 9 more stores in the last quarter of the year bringing the total yearly store openings to 28. With new global locations, Costco can increase sales and can also draw in new members.

Membership is the price all Costco Wholesale Corporation (NASDAQ:COST) customers pay to have access to the cheap, bulk items that the company sells. The company has 3 levels of membership that include the gold star membership, business membership, and executive membership. Gold star and business are essentially the same basic membership, but executive membership gives customers 2% annual cash back and costs twice as much as the other two. Executive members account for 1/3 of Costco’s members and 2/3 of the company’s sales. Increasing executive membership penetration is important to increase Costco’s sales growth. Last quarter, overall membership revenue rose 12% from $475 million to $531 million. This comes from a 19% increase in new membership that stems from global expansion and increased executive membership. Charging a membership fee also creates an incentive for customers to go shopping. They’re paying for access to the store, they should get the most out of it.

Costco Wholesale Corporation (NASDAQ:COST) has also been utilizing its website. Available in the U.S., U.K., and Canada, the company has seen e-commerce sales increase 20%. This should continue to grow as the company expands and improves its web capabilities.

Expansion doesn’t come without a cost. Cannibalization has negatively impacted sales by approximately 60 basis points. This is a small price that Costco pays for its necessary growth.

The others

Costco Wholesale Corporation (NASDAQ:COST)’s main competitors are Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT).

Target has been struggling in 2013. The company recently posted quarterly earnings per share of $1.05 which was a 5% decrease from 2012. Comparable store sales decreased 0.60% which led to a quarterly revenue decline of 1.00%. Target Corporation (NYSE:TGT)blamed these disappointing numbers on this years unusually cold and wet weather that hurt the sales of “spring” items.

Wal-Mart Stores, Inc. (NYSE:WMT) has been doing better than Target Corporation (NYSE:TGT). The company’s first quarter earnings per share increased 4.6% to $1.14 and it expects a 3.4% earnings growth in the current quarter. The retail giant grew e-commerce sales by 30% and opened up 5 million square feet of retail space. Despite this, the company’s revenue growth was only 1% year-over-year lagging behind Costco.  Wal-Mart also owns Sam’s Club, a warehouse store that requires a membership fee like Costco.  The difference between the two is customer service.  In a consumer reports survey, 26,000 shoppers evaluated 10 major retailers that included Costco and Sam’s club. Costco was the top rated store in the survey with Sam’s club receiving average ratings.  Wal-Mart Stores, Inc. (NYSE:WMT) stores have also received criticism for being poorly organized and having empty shelves.  Wal-Mart owns 620 Sam’s club locations and over 10,000 other stores.  With this many stores, cannibalization is an issue for expansion.

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