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This Warehouse Retailer Has a Long Way to Go

October 25, 2014 | About:

In an environment where people are not much willing to part with their hard earned money, it is difficult to make them splurge. Thus, retailers are expected to feel the pinch of lower consumer demand. Although consumer demand in the U.S dropped 0.1% in July, the same showed growth in August. Consumer spending grew 0.5% in August, over the previous month. This is mainly because of the increase in income and the back-to-school season, which enabled people to buy.

The effects of this are reflected in the results of some of the companies. Costco Wholesale Corporation (NASDAQ:COST), which operates a chain of membership warehouses, reported a blockbuster fourth quarter results. The numbers beat the Street’s expectations, sending its share price north.

By the numbers

Driven by higher demand, sales jumped 9% to $35.52 billion as compared to the previous year. Thus, it beat the estimate of $35.47 billion. One of the primary drivers of the increase in the top line was higher membership fees. Revenue from membership fees surged to $768 million from $716 million, in the prior year. The company has increased its membership fees in the previous quarter, which resulted in higher revenue.

Further, higher sales in August, due to the back-to-school season led to more revenue. Also, demand for categories such as clothes and home appliances increased. Therefore, the company registered same store sales growth of 6% during the quarter. In fact, the growth was throughout all the geographic regions. Comparable store sales grew 6% in the U.S. and 8% in the International market.

The warehouse retailer promoted its products largely, which lured customers to its stores. In fact, the business model of this company is such that it enjoys membership fees every year and provides huge discounts in return. Also, the customers have to buy in bulk, resulting in higher volumes.

Therefore, the bottom line jumped to $1.58 per share from $1.40 per share last year, higher than the estimate of $1.25 per share. Gross Margins also expanded 14 basis points to 10.7%, as the company managed its costs well.

At the other end

The grocer Wal-Mart’s (NYSE:WMT) Sam Club is a direct competitor to Costco Wholesale. However, it is unable to perform as well as Costco. Although Wal-Mart too was able to beat analysts’ expectations in its recently reported second quarter, it witnessed flat same store sales. Decline in store traffic and lower transaction size affected the top line.

Some positives

However, Costco Wholesale continues to perform well and plans to strategize well for the near future. It plans to ramp up its promotional activities in order to attract more and more people. Also, it plans to expand its presence through new stores. It will be opening 8 new stores by the end of this year. These new stores should contribute largely to the revenue base.

Another point of focus for the retailer is the e-commerce operations. Since online shopping has become very popular, Costco has been working to reap the benefits of this growing segment.

Final word

Costco Wholesale registered a great quarter and plans to continue to do so through its strategic measures. Increasing membership fees and providing lowest possible costs has worked in its favor. Further, it has been doing better than its peers such as Wal-Mart’s Sam’s Club. With higher promotions and expansion on the cards, this company should be able to provide good returns.

Rating: 2.0/5 (1 vote)



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