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Costco (COST) Looks Well on Track Despite Recent Sales Blip

Zacks Equity Research
·4 min read

After impressive comparable sales run in the first three months of the current year, Costco Wholesale Corporation COST witnessed a sudden decline in the month of April. On the surface, this gives an impression that the stock, which was once looking resilient, has succumbed to the coronavirus-led crisis. However, a meticulous approach clears the air that this operator of membership warehouses is fundamentally sound and the recent decline was only a blip due to certain temporary factors.

This Issaquah, WA-based company highlighted that stay-at-home orders, social distancing and some mandatory closures resulted in lower traffic and soft sales at warehouses. However, the company’s e-commerce sales showcased a sharp increase, courtesy of Costco’s loyal customer base who shopped for essentials from home amid the lockdown. Industry experts believe that as lockdown is gradually lifted and stores begin to open Costco’s sales will pick up.

Let’s Delve Deep

Costco’s comparable sales for the month of April — the four weeks ended May 3, 2020 — fell 4.7%, following an increase of 9.6%, 12.1% and 6.6% during the months of March, February and January, respectively. We note that comparable sales for April reflect a decline of 3.3% in the United States, 11.7% in Canada and 4.6% in Other International locations, respectively.

Meanwhile, net sales declined 1.8% to $11.39 billion during the month under discussion, following a rise of 11.7%, 13.8% and 8% in March, February and January, respectively.

Management pointed that sales for the month under review was adversely impacted by limited service in Travel and Food Courts; closures of most of Optical, Hearing Aid and Photo departments, and reduced volume and price deflation in Gasoline Business. Cumulatively, these hurt April sales by an estimated 12 percentage points, of which roughly 70% was due to gasoline business.

Excluding Gasoline Business, Optical, Travel, Food Court, Hearing Aids, Photo and Foreign Exchange, comparable sales for the month of April rose 8.6% with 11.2%, 1.5% and 4.3% increase in the United States, Canada and Other International locations, respectively.

We note that the company’s e-commerce comparable sales soared 85.7% during the month of April. This follows an increase of 48.3%, 22.6% and 17.6% in the months of March, February and January, respectively.

Costco, which shares space with Walmart WMT, Amazon AMZN and Target TGT, has been adopting the omni-channel mantra to provide a seamless shopping experience online. The company operates e-commerce sites in the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia.

To drive its online sales, the company launched CostcoGrocery to deliver non-perishable items to buyer’s home, and expanded same day grocery delivery service in collaboration with Instacart. Recently, it acquired Innovel Solutions, a leading provider of third-party end-to-end logistics solutions. The buyout will boost Costco’s e-commerce capabilities and facilitate sales of "big and bulky" items.

All in All

Costco continues to be one of the dominant warehouse retailers based on the breadth and quality of merchandise offered. In fact, its strategy of selling products at heavily discounted prices has helped it to remain on growth track. Additionally, a differentiated product range enables it to provide an upscale shopping experience for members. The company’s growth strategies, better price management, strong membership trends and increasing penetration of e-commerce business have been also supporting the performance.

Notably, shares of this Zacks Rank #3 (Hold) company have gained approximately 3.7% so far in the year against the industry’s decline of 7.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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