Things don’t appear to be going in Costco's (COST, Financial) favor. The company is struggling and seeing weakness in its operations. Even in the past, Costco has seen weakness during the Thanksgiving and holiday season. The company’s profit margins were further hurt by fluctuations in the foreign exchange rates – not only in the U.S., but also in Canada and Japan. The lower exchange rates between the Canadian and the U.S. dollar and the Japanese yen have hurt the margins by 8% and 15%, respectively.
But, despite weakness, Costco also saw some improvement in sales. The company saw an impressive 6% increase in total sales, while comp sales of the company rose by 3%. This could have been better, but sales were negatively impacted by gas price deflation. The company found it hard to align itself with the changing deflation, and with no backup, Costco saw weakness in its sales.
Expansion will lead to growth
Moving forward, the company is working on its expansion strategy. It has already opened three new locations in the second quarter, two in the U.S., and one each in Illinois and Texas, and one in Ontario, Canada. However, the company had to shut down its Acapulco, Mexico, location due to a hurricane.
But, this didn't hurt Costco’s robust outlook. In addition, the company is expecting to open an additional 14 locations, three in the third quarter and 11 in the fourth quarter. In accordance with this, the company plans to open additional location in the U.S., Japan, the U.K., Australia, and Canada. Also, Costco plans to enter Spain by opening its first store there.
This expansion strategy can be seen as a diversification strategy by the company and is expected to benefit by contributing to its top line in the future. Costco is expecting its Southeast, Midwest and San Diego regions to be the strongest. It is also expecting better results from Mexico and Canada.
Moreover, new membership signups are proving to be a growth driver for Costco. In the second quarter, Costco saw a 13% growth in new memberships. These new memberships came primarily from international sign ups. Also, the renewal rates of the membership continue at record levels and Costco is seeing increasing penetration of executive memberships.
Good strategies
Costco has always focused on maintaining good inventory. This has benefited the company over time. It has managed the inventories pretty well, resulting in average inventory per warehouse to rise by 4%, about $500,000 from $12.2 million to $12.7 million. Moreover, the inventories are in good shape, and the company is expecting better services in the future to add to its top line.
Moving on, Costco is focusing on the e-commerce segment as it sees immense opportunity in this area. It has already started working with e-commerce initiatives in the U.S., Canada and the U.K. Also, Costco recently started e-commerce operations in Mexico.
Besides all these moves, Costco has re-platformed its site. It has added some mobile apps, and has also combined some e-commerce merchandise efforts with Costco’s in-line efforts. In addition to this, the company has added a few categories to e-commerce such as apparel, health and some beauty aids. Also, the company has made improvement in shipping policies; it has improved the timing of shipments by shipping out of three depots instead of one.
All these attempts by the Costco are focused at increasing customer engagement at its stores. This will improve sales in the future. Moreover, Costco is also testing its e-commerce operations with Google Express.
Conclusion
With such initiatives, Costco is trying to gain traction in the market. The company is doing well to attract more customers as we saw by an increase in its membership growth, while focus on e-commerce is another positive. So, investors should consider Costco for the long run.
