Economic uncertainty is not always good for companies and their financial performance. But there are some companies that benefit from the situation. Costco Wholesale Corporation (COST, Financial) is among those companies that have done well in the last few quarters due to a strategy of selling goods at unusually lower prices at the cost of a small annual membership fee. This was reaffirmed by its recent results that beat Mr. Market’s expectations. Let’s dig into its recent performance.
A performance worth noting
Lower tax rate and higher gasoline prices helped revenue shoot up 9% and earnings by an impressive 13% to $1.58 a share. Even though the increase in gasoline prices was offset by the negative effect of foreign exchange movement, the comparable store sales surged by 5%. The company also witnessed a surge of 9.2% in membership fee revenues driven by an increase in the membership fee.
The key strategy of the company which worked in this sluggish economy was the fact that it provides all range of products possible, especially the daily needs products, at huge discounts. The customers pushed the volumes, especially in the case of non perishable products, as it offered discounts for bulk purchases. This increased store traffic and Costco enjoyed the benefit of a continuous increase in its market share. In fact, even online traffic to its website has been increasing.
Expansion plans
Costco has planned to open 16 new stores by the end of fiscal year, 10 stores have already been opened. The six remaining stores are scheduled to be opened in the fourth quarter. The total store count is currently 602.
But with all the good news in place, the company faces tough competition from two major players, namely, Target (TGT) and WalMart (WMT). Costco managed to beat both the competitors in terms of profit growth with Target posting 5% growth and Wal-Mart posting 10% growth in profits over the same period last year.
Conclusion
Costco’s lower margin strategy has worked wonders for the company and it has been continuously making investors happy. Moreover, it has been growing and surpassing its close competitors in the race, making it a relatively safer bet in this uncertain economic situation.
