Shares of American warehouse retailer Costco (COST, Financial) were down by 1% after the news about lower than excepted March sales broke out, clearly hinting at investor’s displeasure. As of this writing, the stock is trading at $148.64, down from previous close of $152.00. Costco is America’s second largest retailer, after Wal-Mart (WMT, Financial), and is rated highly by industry experts and analysts. So, should investor’s be worried about this dismal March sales figure? Let’s take a look.
Not up to the scratch numbers
Yesterday Costco announced the result for march sales – the figure came at $10.40 billion compared to prior year period’s $10.43 billion, translating into a 2% decline. The single digit drop exceeded analyst estimates who had anticipated the drop to be a little lower at 1.2%. While comparable sales in the U.S. market remained flat, international sales took a 9% hit. Management attribute the drop to one less selling day because of the timing of Easter. According to Costco, this brought down comp sales by 1% and 1.5%.
"This calendar shift negatively impacted this year's net and comparable sales by an estimated one to one and a half percent' - Costco
Apart from this, gasoline price deflation and unfavorable foreign exchange took a toll on the company. Absent these factors, its comp sales for March increased by 4%, but one point that deserves mention in this context is that the situation could have been worse. Costco is one of the largest fuel retailers in the country and it received some help from the dynamics of the plunging fuel prices - the rate which it pays for procuring fuel fell faster than the rate which consumers pay for buying fuel from the retailer at the pumps. Thus, the magnitude of the drop was balanced to some extent.
Should investors be alarmed?
Costco’s comp sales for the five week period may have dropped 2%, but the 31-week comp sales figure is up 2%. Excluding the negative impacts from gasoline price deflation and foreign exchange, 31-week comp sales figure improved 7%. The wholesale retailer is among the few reliable companies that have proved their worth time and again. Its membership fee based business model has worked wonders and helped revenues increase at an average rate of 8% over the last 10 years, and earnings has improved 10% on an average over the same time period. Because of such robust performance, the shares of the company has been in demand and has averaged a 22x multiple since 2007 according to a report published in The Street.
Costco is adopting some strong moves to make its presence felt in the international markets. In China it has partnered with Alibaba’s Tmall Global online platform to sell its products such as food and health care goods and also Kirkland Signature products. Its focus on customers has resulted in high satisfaction levels, loyal customers and repeat purchases, and all this has aided the membership renewal rates. Over all, Costco’s good points outweigh the negative, and definitely a quarter of slightly lower comp sales doesn’t pose as a warning sign for the investors.
