When warehouse club operator Costco Wholesale Corporation (COST, Financial) released its fourth quarter numbers on October 8, it did send a feeling of happiness through its investors as it was a better-than-expected performance with Costco having logged a 7% rise in comparable sales for the quarter. But the best part was that the company wants to earn more for its investors and that’s why right now the company has been peaking up its capital expenditure to achieve an aggressive plan which might be a big down payment on future sales growth. Let’s take a peek and try to take a brief insight into the plan that would aid in reaching new heights in terms of sales growth for the company.
Taking the ultimate initiative
In the fiscal year 2014, the total revenue earned for the full year crossed the $110 billion mark. In fact, Costco is well known for its customers’ loyalty, and this was evident when 91% of its club members renewed their subscription in the fiscal year 2014. Indeed, on a global basis almost 87% of the members renewed their subscription during the fiscal year. Also the comp sales improvement in the fiscal year stands as testimony to customer loyalty.
As the management does not want to settle for industry-thumping comps alone, it’s on an expansion spree for which the capex is capped to around $2.5 billion to $2.7 billion for the fiscal year 2015. The company has already spend close to $2 billion this fiscal year, most of which was spend on store remodeling, expansion of ancillary business operations and new store openings that are the chief aspects of its expansion program. The company believes that opening of new store at multiple locations internationally will not only build its brand image, but also aid in enhanced sales for Costco, thus taking it to newer height
Providing impetus to growth
The company spent close to $2.2 billion this fiscal year on capital investments, with almost all the cash going into new-store openings. This is not a new phenomenon for Costco as even in 2013, the company shelled out $2.1 billion to open 26 warehouse stores involving a cost affair of $80 million each. This could have been termed to be a risky investment, but Costco’s management were assured of obtaining an average of around $100 million in revenue to start with from the new stores.
The company’s management mindset is that the best way to reach customers is through store openings and based on this thought in the fiscal year 2013, it pledged to open around 150 stores in the next five years. In one of the research notes Goldman Sachs has written that the company follows the idea that “everything will take care of itself” if sales are satisfactory.
So, the new store opening process is a key function in the company’s growth program as it always wants to stay ahead of rivals such as Walmart (WMT, Financial) and Target (TGT, Financial) in its store count and spread. Therefore, the management decided in 2013 to open about 55 new stores in the U.S. while the remaining 95 stores were to be scattered across Canada and other international locations. Presently, Costco has around 88 stores in Canada and 109 in other international locations.
The plan of action set by the management in fiscal year 2013 seems to be on track, as the company has already opened 26 new stores in 2013 and another 29 this fiscal year, net of closures and relocations. This fiscal year, the global count of stores stood at 663, contributing nearly 7% to the leap in annual revenue to $110.2 billion.
The management have shared that around 36 new stores are planned to be opened in fiscal year 2015, and the lion share of the capex for 2015 would go under investments in land and equipment for both new and refurbished warehouses.
Putting the best foot forward in China
Costco has made its presence felt in the Asia Pacific region, but till now it does not have any presence in China, the nation with the largest consumer population. Till date Costco hasn’t announced the opening of any store in China, but it has instead partnered with Alibaba (BABA, Financial) recently, the largest ecommerce chain in China, to set up an online store in the latter’s Tmall site. According to Costco’s executive vice-president, Jim Murphy, “Costco sees tremendous growth opportunities in China, especially in light of Chinese consumers' increasing appetite for imported products…"
Besides Japan and Korea where it already has 20 and 11 stores, respectively, this is the second-best aggressive move by the Washington-based warehouse club into the emerging markets where it foresees ample sales growth opportunities in the quarters ahead.
Maintaining the legacy from the past
For Costco, it was never difficult to pick up sales in its new stores or warehouse locations which have started pulling their own weight almost in the same year of their opening. The chart below gives an idea of the average revenue earned per warehouse, listed by opening year. At the top right, we can see the performance of the stores opened in 2013, which generated $100 million of annual sales in the same year of their opening, well, this trend has been normally seen by the company in the past ten years and thus makes it a viable investment option for investors as Costco has always been able to build its revenue amid intense competition.
In the chart, as we move down that right column it shows how these young warehouses only get stronger with time as their membership count keeps improving. That’s why a store opened five years back currently generates close to $140 million annual sales pace which is truly a remarkable achievement for the company stimulating brisk sales growth.
Costco has a track record of being able to generate positive cash flow, and currently has over $5.8 billion in cash and cash equivalents as on August 31 of the fourth quarter of the fiscal year 2014. With sufficient cash in hand, spending capex on opening new stores has never been a problem for Costco. Investors are thus confident that the capex spend every year by Costco on stores opening translates into significant sales growth in the days ahead. And that’s how, at the end of the fiscal year 2014, Costco crossed the $110 billion mark in revenue leaving its immediate rivals agape.
Final thoughts
Costco is on a perfect sales growth trajectory and investors are assured to see better returns on their investments in the near future as more store openings translate into more footfalls and in turn positively impact the top line of the company. The warehouse club that provides a wide selection of merchandise is all set to create a niche for itself amid fierce competition, thus taking its revenue to newer heights much above the $110 billion it just blew past in the fiscal year 2014.
