Updated Research Report on Costco - Analyst Blog

Costco Wholesale Corporation COST 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 maintain positive growth amid the 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 U.S., Canada, U.K. and Mexico.

Having delivered comparable-store sales growth consistently, Costco is well positioned in the warehouse club industry. Costco delivered comparable-store sales growth of 2% in February. The company's second-quarter fiscal 2014 results also hint the same, wherein top-line growth rate rose to 5.8% from 5.5% in the first quarter, while comparable-store sales increased 3%.

However, earnings of $1.05 per share tumbled 4.5% from the prior-year quarter and fell short of the Zacks Consensus Estimate of $1.17. Costco has delivered negative earnings surprises in the last 4 quarters — 10.3% and 5.9% in the second and first quarters fiscal 2014, respectively, while 4.1% and 1.9% in the fourth and third quarters of fiscal 2013, respectively.

Moreover, Costco faces stiff competition from Target Corp. 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

The other better ranked stock worth considering in the retail sector is Burlington Stores, Inc. BURL carrying a Zacks Rank #2 (Buy).