Costco's (COST, Financial) stock valuation is up 26% over the past year. Experts are expecting further profits once the company announces its earnings report post market closing on May 27.
Costco’s strong performance can be attributed to many reasons including its strong performance and plans for expansion. A gradually improved sales climate is looking to boost the company’s revenue and sales numbers. During the second quarter, Costco’s sales figures rose 4.3% and its profits spiked upwards at 29%. Costco’s membership model continued to self-sustain itself and continue being one of the company’s best performing divisions with membership fees of $582 million being collected the past quarter while at the same time helping boost overall financial results with a revenue of high margin.
Expectations high for Costco
Costco should report third quarter fiscal revenue of $26.6 billion with a rise in revenue of 3%. Thanks to gas price deflation as well as the strong US dollar revenue growth was impacted. These factors were also evident in the same stores of only 7%.
Steps going forward
Costco has set itself a club opening schedule where the wholesale divisions company is touted to open 30 new clubs as well as 25 to 30 every year going forward for the next few years. Half of these Costco clubs will be in international markets. The international business is slowly picking up, and will soon be one of the company’s strong revenue boosters. International same store sales have been reporting 5% to 8% growth in sales compared to US same store sales of 2% to 3%.
Company profile
Costco Wholesale Corporation was originally known as Costco Companies, Inc. and was founded in 1976. Based out of Issaquah, Washington, Costco and its subsidiaries operate warehouses on a membership model. Costco offers branded as well as private-label products in many categories such as snack foods, tobacco, appliances, electronics, meat, deli and produce, small appliances and office supplies. Costco also owns and runs food courts, pharmacies, gas stations, travel companies and photo processing centres. As of October 2014, the company owns 664 warehouses globally and also sells its products online via its websites.
Analysis
Costco’s gross profit margin for the second quarter of its fiscal year 2015 is basically unchanged when compared y-o-y. The company has however managed to increase its sales and net income number at a quicker rate than the average competitor in the industry in this quarter compared to the same quarter a year ago. Costco however does have extremely weak liquidity with a quick ratio of 0.48 clearly showing an inability to cover short term cash requirements. The company’s liquidity has dropped since the same period last year. This same period has seen stockholders’ equity drop by 11.36% from the same quarter last year. The measurements of Costco’s liquidity numbers indicate the company is placed to be hit by financial difficulties in the near future.
Operating in the food and staples retailing sector which is the second largest segment of the consumer staples industry, this industry includes wholesale food distribution, grocery retaining, drugstores and speciality food stores. Major players here include Wal-Mart (WMT, Financial), Whole Foods Market (WFM, Financial), Walgreen Co (WAG, Financial), Sysco (SYY, Financial), CVS Caremark (CVS, Financial) and Kroger (KR, Financial).
Analysts are giving Costco a BUY rating. This rating is based on many positive investment numbers coming together helping the stock perform well in the market. Costco’s strengths lie in various areas as increased revenue growth, impressive stats of EPS growth, compelling net income growth, positive cash flow from operations and solid stock price performance in the market. These strengths should outweigh the fact that Costco shows very low profit margins.
