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Costco Sales Rise

Zacks Equity Research

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted sales data for the five-week period ended April 1, 2012. Sales climbed on the back of higher gasoline prices but fell short of analysts’ expectations as unfavorable foreign currencies fluctuation remained a drag.

The company sustains its sales momentum as it moves further into 2012. After an 8% increase in February, Costco’s comparable-store sales for the month of March climbed 6%, reflecting comparable sales growth of 6% at its U.S. locations and 7% at its international divisions. In the prior-year period, the company delivered comparable-store sales growth of 13%.

For the 31-week period ended April 1, 2012, the company registered comparable-store sales growth of 8%, with U.S. and international sales jumping 8% and 9%, respectively.

Excluding the effects of higher gasoline prices and foreign currencies fluctuation, Costco’s comparable-store sales for March climbed 6%, with U.S. and international comparable sales increasing 5% and 9%, respectively. For the 31-week period, the company registered comparable-store sales growth of 7%, with U.S. sales rising 6% and international sales climbing 10%.

Total net sales for March jumped 10% to $9.13 billion from $8.33 billion in the same month last year. For the 31-week period, sales increased 11% to $56.34 billion from $50.79 billion in the same period last year.

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandises it offers. The company’s strategy to sell products at heavily discounted prices has helped it to sustain growth amidst the 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 Target Corporation (TGT) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT), which follows a similar business model that pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition may depress sales and margins. In terms of performance, Target surpassed Costco, posting comparable-store sales growth of 7.3%, and raising its first-quarter 2012 earnings per share guidance to a range of $1.04 to $1.10 from 97 cents to $1.07.

Costco currently operates 601 warehouses, which include 434 in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, 8 in Taiwan, 7 in Korea and 3 in Australia.

Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful on their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.

Given the pros and cons, we maintain our long-term “Neutral” recommendation on the stock. However, Costco holds a Zacks #3 Rank that translates into a short-term “Hold” rating.

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