Costco Sustains Sales Momentum - Analyst Blog

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted healthy sales data for the four-week period ended August 28, 2011.

The company has been able to maintain its sales momentum. After a 10% increase in July 2011, Costco's comparable-store sales for August rose 11%, reflecting comparable sales growth of 9% at its U.S. locations and 18% at its international divisions. For the fifty-two week period ended August 28, 2011, the company registered comparable-store sales growth of 10%, with U.S. and international sales increasing 7% and 16%, respectively.

For fourth-quarter 2011, comparable-store sales climbed 12%, reflecting comparable sales growth of 10% at its U.S. locations and 19% at its international divisions.

The sales results include contribution from the company's Mexican joint venture. Costco began incorporating results of its Mexican operations on a prospective basis with the commencement of its fiscal 2011 on August 30, 2010.

Excluding the effects of higher gasoline prices and a softer dollar, Costco's comparable-store sales for August climbed 7%, with U.S. and international comparable sales increasing 6% and 11%, respectively. For the fifty-two week period, the company registered comparable-store sales growth of 6%, with U.S. sales rising 5% and international sales climbing 10%.

For fourth-quarter 2011, comparable-store sales climbed 7%, reflecting comparable sales growth of 6% at its U.S. locations and 10% at its international divisions.

Total net sales for August jumped 17% to $6.9 billion from $5.9 billion in the same month last year. For the fifty-two week period, sales increased 14% to $87 billion from $76.3 billion in the same period last year. For the fourth quarter, sales soared 17% to $27.6 billion from $23.6 billion in the prior-year quarter.

Excluding the contribution from the company's Mexican joint venture, sales would have increased 14% and 11% for the four and fifty-two week periods, respectively. For the quarter under review sales would have rose 14%.

Costco currently operates 592 warehouses, which include 429 in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 9 in Japan, 7 in Korea, 8 in Taiwan and 3 in Australia.

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it offers. The company's strategy to sell products at heavily discounted prices has helped it to sustain growth in 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 BJ's Wholesale Club Inc. (BJ) and Sam's Club, a division of Wal-Mart Stores Inc. (WMT). The rivals follow similar business models as they market 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.

With the August sales results, Costco also announced a management restructuring. Jim Sinegal, the chief executive officer of the company will step down on January 1, 2012. In his place, Craig Jelinek, the current president and chief operating officer, will hold the baton.

Currently, we have a long-term ‘Neutral' recommendation on the stock. Moreover, Costco holds a Zacks #3 Rank, which translates into a short-term ‘Hold' rating.