Is it Time to Cut COST From Your Portfolio?
tarun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Costco’s (NASDAQ: COST) fourth quarter results were well above analyst expectations with increased revenues over the last four quarters and net profit increases over the last three. Despite membership fee hikes, customers renewed their memberships and shopped more often, thus improving store results. Consumers are moving to Costco or Sam’s Club for bargains and to save money in a poor economy with a high unemployment rate.
Costco reported its current quarterly revenue at $3.22 billion and net income at $609 million, soaring by 14.3% and 27.4%, respectively, on QoQ basis. Same store sales have increased by 6% in the U.S. and 7% overseas and fee revenue has also increased by about 18%, helping revenue prosper. Online sales have also climbed by 14%. The overall growth has been affected by volatile gas prices and foreign exchange currency rates, but their own gas station has been the main reason of new membership sign ups. Costco has warehouses in the U.S., Canada, Mexico, Japan, Korea, Taiwan and the U.K. with 14 new stores expected to open by Dec. 2012. Next year, the company plans to open about 27 to 30 new sites increasing its capital to about $2 billion.
The Other Players
Costco has handled inflation and has thrived well through a sluggish economy, but the retail giant Wal-Mart (NYSE: WMT) may also get some benefit by increasing its membership fees of its chain brand Sam’s Club. Wal-Mart has not increased membership fees since 2006 but keeping the drought conditions and rising food prices in mind it may soon have to increase its fees. The company is also expanding and planning to add more supercentres than small stores and add more products, including gasoline, which may stiffen things up for Costco. Wal-Mart is also looking forward to increasing its e-commerce business and charm its customers by testing same-day delivery in certain markets this holiday.
Target (NYSE: TGT) has offered merchandise that shoppers cannot find anywhere else but its U.S. concentrated business does not let it reap the benefits of diversification like Costco, with its operations in many regions. Target is also trying to diversify its market by opening stores in Canada in a big way by taking 220 Zellers store leases from Hudson’s Bay. It will open 125 stores in 2013. Target has a better dividend yield of 2.3% than its peer, but Costco is presently yielding just over 1% and could increase its dividend by a significant margin.
Costco has seen an all time high share price last Wednesday of $104.43 after the earnings for the quarter and whole year were reported. Like the year 2000 when share prices have crossed triple digits; the company can soon announce a share split which will make it more tradable. Though concentrated mainly in the U.S., the company has made successful international expansions and might likely add a new country every passing year.
Despite stellar performance and surpassing all analyst estimates, the price closed up by only 1.92%. I believe the only reason for such marginal increase is that the stock is fairly priced with all factors duly considered. Considering recent market behavior even a strong exceptional performance might produce only very small returns and has a relatively large downside risk. I strongly feel it is a good time to cash in the investments in Costco.
tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.