What's Driving Sales at This Retailer?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Costco (NASDAQ: COST) has shown growth signals on several metrics in this fiscal year. The membership renewal rate, which is a good indicator of customer loyalty, has been on the higher side this year. Its membership income continued to grow with the hike in the membership fee last year. It has expanded its stores base, and it has been able to attract new members at new locations. Apart from store expansion in the US, it has also increased the number of international stores. Furthermore, it has a share re-purchase program in place, which will boost shareholder’s confidence about the company. Let’s discuss these points in detail.

Membership renewals are good signals for sales growth

Membership fees are a very important piece of revenue for the company as it adds directly to the bottom line. Its membership fee income grew by 12% in the third quarter this fiscal year.

This income growth was driven by increased membership fee, new members and high renewal rates. Its membership renewals were 89.9% in the US and approximately 86.4% worldwide. These renewals are more impressive after the 10% membership fee increase last year. It shows the trust of customers in the company, and it will ultimately drive the company’s sales in the long term.

Increased investment in store expansion will help it to increase customer base

Costco has increased its net cash used in investing activities in the first three quarters this fiscal year to $1.12 billion from $517 million spent last year in the same period. This increase was driven by $479 used in warehouse store expansion and remodeling.

The company has expansion plans of 28 stores this year, and had opened 19 stores by the end of the last quarter. This growth is significant as compared to 16 stores opened last year. In its international expansion plans, it has opened stores in Japan, Mexico and the UK. International markets will be growth drivers for it in the future.

Share repurchase program and dividend will boost investors’ confidence

Costco's share repurchase program and dividend will be confidence boosters for its investors. In the first three quarters of the fiscal year, the company has repurchased 357,000 shares at an average price of $96.41. It had $3.05 billion available on May 12 for this approved stock repurchase program.

Its quarterly dividend rate of $0.031 per share is also up in the third quarter this year as compared to $0.275 per share of same period last year.

Peer analysis

In the discount retail stores sector, the other two major players which are competitors of Costco are Wal-Mart (NYSE: WMT) and Target (NYSE: TGT).

Wal-Mart has growth plans in the US market, international market and on the e-commerce platform. In the US, it is moving to urban centers with its small format Express stores and Neighborhood stores. In international growth, it is aggressively expanding in Canada with 40 new Supercenters. It is also expanding its store base in emerging economies like China, Brazil and South Africa. Its e-commerce platform, with its acquisitions and partnerships with other players in the domain, will be a good growth driver for the company.

Target Corporation entered Canada this year after two years of preparation and customer engagement. Its Red card penetration, even before its entry in the country, has helped it to enter successfully in the Canadian market.

Its Red card penetration in the US is expected to increase 15-20%. In the US, youth focused City Target stores have generated good sales growth and can be growth drivers in future. Its Omni channel network and collaborated efforts with Facebook, Google and eBay will help it to increase its same store sales.

Company

P/S ratio

Op. Margin

1 yr. Fwd. P/E

Costco

0.46

3%

21.98

Wal-Mart

0.54

5.65%

12.86

Target

0.66

8.43%

12.64

Source: Google Finance and Yahoo Finance

Costco has reported the lowest operating margin of 3% among the three mentioned peers, and highest one-year forward P/E of 21.98. Wal-Mart has lowest P/S ratio of 0.54, but with moderate operating margin and forward P/E. Target is performing the best among the three peers with the highest operating margin of 8.43% and the lowest forward P/E of 12.64.

Conclusion

Costco has achieved a high renewal rate for its membership, and was able to increase its membership fee revenue by 12% in the last quarter. It has store expansion plans this year, which has helped it to attract new members. It has also increased its international presence this year. Its stock repurchase program indicates confidence of the company in the stock and it is expected to do well in future. So, I will recommend a Buy. 


Ash Sharma has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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