Costco Wholesale Corporation (COST) continues to be a dominant retail wholesaler based on the range and quality of merchandise it offers. The company’s strategy of selling products at heavily discounted prices has helped it maintain growth amid beleaguered economic conditions as budget-conscious customers continue to see it as a viable option for low-cost necessities.
We believe that Costco’s differentiated product range enables it to provide an upscale shopping experience to its members, resulting in market share gains and higher sales per square foot. Moreover, it continues to maintain a healthy membership renewal rate. The company is also gradually expanding its e-commerce capabilities in the U.S., Canada, U.K. and Mexico.
Having delivered comparable-store sales growth consistently, Costco is well positioned in the warehouse club industry. It delivered comparable-store sales growth of 6% in May. The company’s third-quarter fiscal 2014 results also depict improvement, wherein top-line growth rate rose to 7.1% from 5.8% in the second quarter, while comparable-store sales increased 4%.
The quarterly earnings of $1.07 per share rose 2.9% from the prior-year period but missed the Zacks Consensus Estimate by a couple of cents. Costco has delivered negative earnings surprises in the last 4 quarters — 1.8%, 10.3% and 5.9% in the third, second and first quarters of fiscal 2014, respectively, and 4.1% in the fourth quarter of fiscal 2013.
Moreover, 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.
Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful of their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.
Currently, Costco carries a Zacks Rank #3 (Hold).
Other Stocks Worth Considering
A better-ranked stock worth considering in the retail sector is The Kroger Co. (KR) carrying a Zacks Rank #2 (Buy).