Costco (COST, Financial), the largest warehouse club-chain in the United States, reported a 13% increase in its net profit in the fourth-quarter results that were declared recently. Costco witnessed strong sales for its same-store sales during the quarter. Also, it benefited largely through its membership business that rose approximately 7.3% to $768 million for the quarter. However, the weakness in its gasoline prices and foreign currency headwinds pressurized its numbers during the quarter.
The Issaquah, Washington-based company for the fourth quarter posted revenue of $34.75 billion, an increase of approximately 9% as compared to $31.77 billion in revenue in the same quarter a year earlier. However, the consensus was anticipating revenue of $35.42 billion for the fourth-quarter 2014. Its net income for the quarter came in at $697 million or earnings of $1.58 per share as against the net income of $617 million or earnings of $1.40 per share in the corresponding period last year. The analysts were expecting earnings of $1.52 per share for the fourth-quarter.
What next?
Looking ahead, for fiscal 2015 the company remains focused on inaugurating 31 new warehouse stores domestically as well as in the global market. It plans to open 19 new stores in the U.S and the rest in the international market. Costco is committed to inaugurating eight of the 31 new store locations in the first quarter 2015, including six in the United States and one each in Australia and Mexico. It is additionally also concentrating on relocating its existing stores that should enhance performance for its existing stores going forward. It expects its total capital expenditure to be in the range of $2.5 billion to $2.7 billion little above from its cap-ex in the fiscal 2014. Costco is planning to invest in the new openings and remodeling activities this fiscal year. It is also focusing on enlarging its ancillary business operations and planned expansion of its cross-stock depot operations.
Costco’s sales performance for the same store has been outstanding for the fourth quarter. Its same-store sales performance rose nearly 4% for the quarter. Most of its categories, such as food and sundries, softness, hardness and fresh food, have observed mid-single digit to high-single digit growth during the quarter. The same-store sales rose approximately 5% in the United States and 2% in the global market. Costco for the fiscal year 2014 opened 30 new stores, including 17 in the United States and the rest in Canada, Australia, Japan, Korea, U.K., Mexico and Spain. The company has a total of 663 locations functioning effectively across the world. The company is experiencing comparatively a larger footfall in these new stores that should increase its same store performance for fiscal 2015.
Positive trends
The company is seeing a positive trend in its membership business as it continues to back on the renewal rates. It has completed over 91% renewal for most of its clients in the United States and Canada, while its international renewal for its members remains just above 87%. Costco is seeing solid strength in its Executive Program coupled with new signups that should drive its top line in the fiscal 2015. Its executive membership grew tremendously during the fourth-quarter that now remains just below 15 million.
The company added approximately 450,000 new members during the fourth-quarter 2014. Additionally, it is observing strong traction in its gold star category and primary business memberships that grew 1 million and 3.5 million respectively from 30.6 million and 6.9 million during the fiscal year 2014.
On top of significant growth for both its same-store sales and membership business, Costco is busy executing various strategic initiatives that should lift its performance in the first-half of fiscal 2015. Its strategic initiative includes a nationwide membership promotion plan for new members on living social with the purchase of a full price $55 membership. These new members will get the benefit of $20 Costco cash cards and coupons for three free items. Moreover, the new members will also get a free three-month membership for identity protection and a bonus coupon of $25 off of any Costco.com offer purchase of $250 or more.
These smart moves will certainly augment its sales and fetch a great number of customers to its doors going forward. Costco is additionally offering no-annual fees credit cards under its membership cards that enable the customers to earn cash rewards on all purchases made both inside and outside the Costco with no cap on the amount of rewards that can be earned.
Conclusion
Costco looks a great pick as the company is practicing various strategic moves that are driving performance for its new stores. For example, the sales for its new stores that are opened more than a year rose to 7% during the fourth-quarter. Whereas the sales for the new stores inaugurated in the same time for Wal-Mart Stores Inc. (WMT, Financial) and Target Corp. (TGT, Financial) witnessed little change in sales in their most recent quarters.
Costco is currently trading at the trailing P/E of 27.72 and forward P/E of 22.61 that indicate fair valuations for the stock. Also its balance sheet reflects a total cash of 7.32 billion, which is quite enough to cover its entire debt of 5.09 billion, which is well mixed by most measures.
