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Costco’s (COST) Strategic Endeavors Bode Well


We believe that Costco Wholesale Corporation COST prevails as one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. The company’s strategy to sell products at heavily discounted prices has helped it to remain on growth track as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities.

A differentiated product range enables the company to provide an upscale shopping experience for its members, resulting in market share gains and higher sales per square foot. Moreover, Costco continues to maintain healthy membership renewal rate. Further, it is gradually expanding its eCommerce capabilities in the U.S., Canada, U.K., Mexico, Korea and Taiwan.

We noted that in the past three months Costco’s shares have increased 14.2%, while the Zacks categorized Retail-Discount & Variety industry has gained 1.6%. This primarily can be attributed to positive comparable-store sales (comps) performance in the past five months.

Comps rose 7% in January, following an increase of 3% in December, 1% in November, 2% in October and 1% in September. Net sales were up 9% in January, following an increase of 5%, 3%, 4% and 3% in December, November, October and September, respectively.

What concerns investors a bit the company’s soft start to fiscal 2017. Costco delivered a negative earnings surprise of 1.7% in the first quarter, and total revenue also fell short of the Zacks Consensus Estimate for the eighth straight quarter. Further, stiff competition from BJ’s Wholesale Club and Sam’s Club, a division of Wal-Mart Stores, Inc. WMT, has been a threat.

Nevertheless, we believe Costco’s strategic initiatives will help propel the stock further, unless an unprecedented event derails the same. Given the pros and cons embedded the stock currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the industry include Ross Stores, Inc. ROST and Dollar Tree, Inc. DLTR both carrying a Zacks Rank #2 (Buy). You can see ethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ross Stores delivered an average positive earnings surprise of 5% in the trailing four quarters and has a long-term earnings growth rate of 10.5%.

Dollar Tree delivered an average positive earnings surprise of 2.4% in the trailing four quarters and has a long-term earnings growth rate of 16.7%.

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