Costco (COST, Financial) has been under pressure due to currency devaluations. The negative impact of a weaker foreign currency is evident on Costco’s financial statements. The weakness in the Canadian dollar to the U.S. dollar has led the company to see a decline in regions such as Japan and Canada. However, the strengthening currency in the U.K. and Korea have offset these weaknesses to some extent.
So, Costco is worried about the decline in comparable sales due to currency deflation. Its sales were negatively impacted and were down by 140 basis points last quarter, which is a tricky situation for Costco. Hence, it should certainly take some concrete steps to get over this.
Taking corrective moves
Costco is not ignorant of the fact that it is seeing weakness. In response to this situation, Costco is making advances to get better. It is expanding its footprint, and by the end of fiscal 2014, it is focusing on opening new outlets in different regions to diversify its business. It has planned new stores in regions such as Louisiana, Texas, Japan, Korea and Australia.
Costco is also pleased with membership renewals. It shows that customers are still positive about Costco’s service, which is a good sign for it. The renewal rate through the quarter end was 90.6%. The company sees new member signups, indicating that there is room for it to add new members if it improves its position a bit.
The company has solid expectations from regions such as the U.S., Southeast, and Midwest, as these are showing good growth and were the strongest performers in the last reported quarter. However, Costco is disappointed by the poor performance of Australia due to cannibalization on a relatively small base of existing units.
Moving on, Costco is seeing positive response for its frozen foods, candy and meat and deli categories. Costco is expecting them to stand out in the coming quarters. However, it still expects consumer electronics sales to be down in the days to come. Moreover, Costco is counting on renewal of memberships as it is seeing a good uptick. The Gold Star member addition has also increased from 89.6% to 89.7%, which shows that Costco should work on improving the Gold Star membership.
Making good moves
Costco Online, on the other hand, is also doing well. The company is operating this online offering in countries such as Canada, the U.K. and Mexico. However, besides the U.S. and Canada, this online offering from Costco is new to other regions.
In addition, Costco is also making advances in strengthening its e-commerce merchandising. This move by the company is expected to revise the buying efforts of customers. Under this, Costco is also re-platforming, as well as adding mobile apps, to make it easy for customers to engage with the Costco Online platform.
Further, Costco has also added some new categories such as apparel, some limited apparel items and some limited health and beauty items. It is seeing good traction as the company is seeing better shipments for these items, indicating solid demand in the market.
Conclusion
Costco might be suffering due to currency deflations, but its earnings are expected to improve in the future as its forward P/E of 23.04 indicates. An improvement in the currency rates can improve Costco's performance in the future, making Costco a good buy on the pullback.
