Costco Wholesale (COST)

Quarterly Report Tops Wall Street Forecasts

The bulk discounter reported a 32% increase in its fiscal third quarter profit, topping Wall Street expectations, as cash squeezed customers flocked to its warehouse clubs in search of bargains on food, toiletries, TVs and pretty much everything else.

Net Sales

Net sales for Q3F08 increased 13% to $16.26 billion, from the same period a year earlier. Net income increased to $295.1 million, or 0.67% per diluted share, compared to $224 million, or $0.49 per diluted share. Same-store sales rose 6% in the U.S. excluding gas price inflation while International same-store sales rose 16% excluding the effect of the weak U.S. dollar.

Analysts Upbeat on Results

One analyst said Costco’s same-store sales increase “implies solid top-line trends at the beginning of the month.” This suggests Costco could report May same-store sales of roughly 7-7.5% – ahead of current Wall Street estimates of 6.3%. While shoppers attempt to blunt the effects of surging fuel and food costs,

High end consumers are the reason for success

Warehouse clubs such as Costco seem to be reaping the benefits. So why then are other retailers posting quarterly losses? One reason is that Costco’s shoppers have higher incomes (approximately $100,000/year) than those at Wal-Mart (WMT) so they continue to impulse buy – who doesn’t emerge from Costco with at least one item they had no idea they would be buying that day?

Costco is expanding its retail warehouse empire by opening up 35 new clubs. Since Costco's main sources of revenue are from membership fees, the new clubs will increase revenues as new members shop at new clubs.

The new California law that decreases Costco's employee's pay, will contribute to helping the company increase their total amount of stores. The more stores Costco gets, the more memberships they will receive. All in all this will increase the companies total revenues each year. Membership fees account for 2% of net sales.

The sluggish economy and weak US housing market caused many retailers, especially many department stores, to consolidate in order to reduce costs. This caused many vacancies in malls, which at the end of summer 2010 was 11%. Costco, as part of a new strategy, has gone in and bought many of these spaces. The mall strategy varies drastically from Costco's current warehouse-style retailing. However, the company sees many benefits in this strategy is it allows them to expand much more quickly as they don't have to deal with the infrastructure and community opposition to warehouse stores. Some analysts predict that this strategy could allow Costco to open an additional 4 to 5 stores each year. Mall expansion also places the company in more densely populated areas, which could mean higher traffic and more sales.

Discount retailers and wholesale clubs like Costco and Wal-Mart continue to pull market share from the established electronics leaders like Best Buy. Yet another example of the retail spending transformation we've been seeing in ChangeWave surveys all year.

Although Best Buy (BBY) (40%) remains the number one store respondents say they'll shop at over the next 90 days for home entertainment and networking products, it's showing a 3-pt decline from a year ago (Aug 2007).

Going forward, the stores with the most momentum in electronics are Costco (COST) (26%; up 5-pts Year-Over-Year), Amazon (AMZN) (20%; up 5-pts YOY), Wal-Mart (WMT) (17%; up 6-pts YOY) and Sam's Club (10%; up 3-pts YOY).