Scaling into Costco as it continues to deliver impressive results
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With Costco Wholesale (COST) shares a smidge below our late June $159.72 re-entry price, we will use the current mismatch between share price performance and the company’s business to increase our position in COST shares.
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Our price target on COST shares remains $190.
Late last week, while many were trying to squeeze in the last few days of summer vacation, Cash-Strapped Consumer company Costco Wholesale (COST) reported better than expected August sales, once again proving despite Amazon (AMZN) related fears, Costco continues to gain consumer wallet share. Digging into the August report, in full Costco’s comparable domestic net sales rose 7.3% year over year for the four weeks ending August 27, while the Canadian and International business grew more than 8% and 6% year over year.
Even after we strip out the impact of gas prices, which can be volatile, as well as foreign exchange rates, Costco’s domestic rose more than 6% compared to year-ago level. The same is had with its Canadian results which rose more than 4% compared to year-ago levels and the International segment, up more than 4%. All told, those results bring total company sales up just shy of 6%.
As we like to say context is key and that means comparing Costco’s August sales with those of the last few months. In doing so, we find confirmation for our view that Costco continues to deliver compared to those Amazon related concerns that have weighed on its shares over the last several weeks. In fact, over the last three months, Costco’s comparable sales strengthened climbing a reported 6.0% in June, 6.2% in July and 7.3% in August.
Now let’s add one more layer to the mix – the impact of newly opened warehouses. Over the last three months, Costco opened 9 new locations to bring its total to 741. As impressive as that might be, the year over year comparisons are even more daunting – during the three months ended August 2016, the company opened 7 new locations that brought its total to 715. In other words, year over year ending August 2017, the company averaged nearly 4% more locations for trailing 3-month period. Factoring those additional locations into the sales mix, Costco total sales for the period rose 8.1%.
That doesn’t sound at all like the pain we are hearing from regular brick & mortar retailers, and especially mall-based ones. Yet COST shares are off 12.5% over the last three months. Let’s remember too, with each additional new locations Costco grows its higher margin membership fee income stream, which is a key driver in EPS growth.
In summary:
- With Costco shares a smidge below our late June $159.72 re-entry price, we will use the current mismatch between share price performance and the company’s business to increase our position in COST shares.
- Our price target on COST shares remains $190.