Costco COST Stock – 5 Reasons to Buy

by Jim Woods | April 30, 2010 9:11 am

Costco (COST[1]) stock was a darling of investors during the economic downturn as the warehouse discounter offered cash-strapped consumers a deal and saw strong profits as a result. But with the worst of the global recession in the rearview mirror, investors are wondering what’s in store for Costco stock.

Costco and its discount retail competitors Walmart (WMT[2]) and BJ’s Wholesale Club (BJ[3]) managed to weather last year’s economic storm much better than most retailers.  But now that economic conditions are improving, will shoppers keep ringing Costco’s register? Chances are they will, and COST stock will continue to fly high and offer a high dividend yield.

Here are five reasons why Costco stock should perform well in the months ahead and why COST is a buy:

• Costco earnings show solid profit and revenue – On March 3, Costco reported a fiscal second-quarter profit that was up 25% from the same quarter a year ago. The company said it earned $299 million, or 67 cents per share, for the quarter vs. a profit of $239 million, or 55 cents per share, a year earlier.  And though Costco’s bottom-line number fell shy of consensus expectations, the top-line revenue number of $18.74 billion bested expectations.  Those better-than-expected revenues also were up 11.3% year-over-year.
• COST sees strong international growth – Though Costco receives less than a quarter of its revenue from outside the United States, its overseas business is on the move.  In fiscal Q2 international sales surged 26%.  Through the first half of the fiscal year, international sales have grown more than six times their U.S. counterpart.  Costco also has the biggest international presence among warehouse retailers, and it has plans to further expand into the red-hot retail markets in Asia, and particularly Taiwan. 
• Costco same store sales rising – It’s not just international sales that are on the move.  Costco’s fiscal Q2 same-store sales—a measure of sales at stores open at least a year and a very important metric of a retailer’s health—jumped 9% in the quarter.  That number falls to a 3% rise if you exclude the impact of gasoline sales and foreign exchange, but whichever way you count it, same-store sales are on the rise. That rise was seen again in March, as Coscto same store sales surged 10% for the month.  Wall Street was expecting COST numbers to come in at just 9.3%.
• COST stock paying bigger dividend – On April 22, the warehouse company decided to spread the wealth among shareholders by raising the Coscto dividend to 20.5 cents per share from 18 cents per share. The new COST dividend will be payable May 21 to shareholders of record at the close of business on May 7.  The 14% increase in quarterly dividend means Costco is confident in its fiscal outlook going forward, and in its ability to keep shoppers happy.  And if history is any guide, there will be higher dividends to come down the road. The company has more than doubled its dividend over the past six years, and it’s raised its dividend in each calendar year since 2004.
• Higher Costco membership sales – One good measure of Costco’s future growth potential is the company’s membership revenue. In fiscal Q2 that number was up nearly 9% over the previous year, even though membership fees remained unchanged from the prior year.  More shoppers committing to Costco memberships will likely translate into more foot traffic in stores, and that means a great chance of continued revenue growth going forward.

If these five reasons to buy Costco aren’t enough, then consider that Moody’s Investors Service recently upgraded the retail sector on expectations that credit conditions in the industry will improve over the next 12 to 18 months. According to Moody’s, discount stores were among the most stable segments in the retail space — and that’s great news for Costco.

As of this writing, Jim Woods did not own a position in Costco.

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