- COSCTO wholesale corporation has a 12 month price target of $152.41
- Increasing membership base and warehouses expansions shows long term growth potential
- The company’s performance is majorly driven by net sales, number of warehouses in operations and membership. Sales growth and gross margin is also affected by gasoline price, currency fluctuations and other competition
Costco (NASDAQ: COST) Wholesale Corporation is a Washington based corporation whose subsidiaries operate membership warehouses. It offers members low prices on a wide range of merchandise categories. As of May 10, 2015, Costco operated 673 warehouses worldwide: 474 in United States (in 43 states, Washington, D.C., and Puerto Rico), 89 in Canada, 35 in Mexico, 26 in United Kingdom, 20 in Japan, 11 in Korea, 10 in Taiwan, 7 in Australia and 1 in Spain. The Company's online business operates websites in the U.S., Canada, U.K., and Mexico.
In their recent Q3 earnings report, Costco reported a 1% increase in net sales and 9% growth in net income as compared to the third quarter of 2014. Decrease in gasoline prices and strengthening of the USD negatively impacted the net and comparable sales. Historically, the net sales had been increasing consistently, except for fiscal 2009 (recession). After a 2% drop in revenue in 2009, the sales were back on track.
The company’s performance can also be judged by its increasing member base. Increase in membership base implies increase in revenue. Since members pay an annual fee of $55 or $110 to gain access to the discounted products, they majorly tend to buy the products from COSTCO to justify the membership, even if the product is available at other retailers like Walmart! Being a COSTCO member myself, I can totally relate to this tendency.
Membership sign-ups at existing and new warehouses as well as increased penetration of higher-fee Executive Membership program led to 4% YoY increase in membership fees in Q3 2015.
COSTCO has been offering a variety of merchandise at a lower price to all its members. One of the products offered is cars at a reasonable price without any haggling! According to Bloomberg, COSTCO sold almost 400,000 vehicles last year and is at a spitting distance of No. 1 car retailer AutoNation, which sold 533,000 cars last year. Thus, being a member is beneficial not only to get lower prices for various merchandise for daily household use but also travel destinations, hotels, cars, etc. Such value for money deasl makes me believe that COSTCO will keep on attracting old and new members and thereby increasing its member base and revenue.
In the first week of June, the company reported its May sales results. The net sales for the month of May was $8.98 Bn. Barring the impact of gasoline price deflation and currency fluctuation, COSTCO is doing well on comparable sales front. Retail companies report comparable sales (or same store sales) figures as they help assess what portion of sales growth is due to growth in sales from existing stores (open for more than one year). If a retail company is not doing well on comparable store sales front, then it might lead an investor to believe that company sales have reached a saturation point.
The company has been rewarding the shareholders consistently through dividends and its share repurchase program. In April, the company announced a new share repurchase program to the amount of $4 billion which expires on April 17, 2019. Also the quarterly dividend per share has been increased from $0.355 to $0.40 or annual dividend per share of $1.60.
COSTCO’s business model of lower price offerings on various merchandise will attract new members and renewals from existing members thereby continuing its growth of member base. With increasing member base and additional upcoming warehouses leading to consistent revenue growth, I expect revenue to grow at an average of 8%. Using the revenue growth expectation and Price to Sales ratio valuation, I arrived at a 12 month price target of $ 152.41. This shows that COSTCO stock has upside potential of nearly 12% as compared to closing price of $ 136.39 on July 2, 2015. I am bullish on COSTCO in the long term.