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Costco Wholesale (NASDAQ: COST) experienced something of a growth slowdown in 2016 and early 2017. Comp sales continued to rise, but at a low-single-digit rate, considerably below the warehouse club giant's previous growth rate. Naturally, some investors began to wonder if the company was starting to saturate its market.
However, comp sales growth has reaccelerated over the past year and a half. During that time, Costco has decisively proved that it has plenty of room to keep growing. Last week, Costco reported extremely strong sales results for the final month of its 2018 fiscal year.
Another incredible performance
Costco's net sales surged 12.2% to $11 billion during the four-week retail month of August. Comparable-store sales rose 9.2%, driven primarily by an 11.3% increase in the United States.
Excluding the impact of rising gasoline prices and exchange-rate fluctuations, adjusted comp sales rose 8% last month. That represents one of Costco's strongest monthly sales results of the past year, matching its May performance. Even on an adjusted basis, the U.S. was Costco's strongest region, with an 8.9% comp sales increase, compared with a 4.8% increase in Canada and a 6.8% increase in the company's other international markets.
Costco's comp sales growth is soaring -- especially in the U.S. Image source: Costco Wholesale.
For the full 2018 fiscal year, total sales rose 9.7% to $138.4 billion, despite an extra week in fiscal 2017. Adjusted comp sales increased 6.8%, consisting of a 7.4% gain in the U.S., a 4.1% rise in Canada, and a 7.1% increase in Costco's other international markets.
Digging into the details
The biggest points of strength have been relatively consistent at Costco in recent months. Within the U.S., the Midwest, San Diego, and the Bay Area were highlighted as posting the best comp sales results in August; the former two were also called out in July. Meanwhile, Spain, Japan, and Mexico remained the strongest international markets, joined by Taiwan.
As for merchandise categories, there was broad-based strength last month, with every grouping showing at least mid-single-digit comp sales growth. However, hardlines remained the strongest part of the business, posting another month of double-digit comp sales growth.
Costco's hardlines business has benefited recently from other hardline retailers' store closures. Within hardlines, management pointed to toy sales as being particularly strong in August. This performance suggests that Costco could have a substantial opportunity in fiscal 2019, and particularly during the upcoming holiday season, to capitalize on Toys R Us' recent liquidation.
Costco's e-commerce growth accelerated modestly in August after slowing in July. E-commerce comp sales rose 24.5% in constant currency, up from 21.6% growth a month earlier. That said, Costco still generates the vast majority of its sales in its warehouses, and customer traffic at its warehouses continues to grow at a healthy rate of roughly 5%.
Analysts expect Costco to surpass $150 billion of annual revenue in its 2019 fiscal year, which began last week. That level would give it massive economies of scale and buying power, particularly because it stocks a fraction of the number of products that broadline competitors carry.
That's why competitors can't beat Costco's prices. As a result, the company is well positioned to continue gaining market share from higher-cost retailers for many years to come, particularly as its weakest competitors are forced to downsize or go out of business entirely.
Costco stock certainly isn't a bargain. It now trades for 31 times its projected fiscal 2019 profit. That's particularly pricey, given that Costco will have captured all the benefits of U.S. tax reform and its 2017 membership fee increase by the end of fiscal 2019, potentially leading to slower earnings growth thereafter. Nevertheless, the stock could be worth a look for long-term investors, based on Costco's impressive sales momentum and deep moat.
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