Big-box discount retailer Costco (COST) just reported its fourth-quarter numbers for fiscal year 2015, and while they didn’t impress, they didn’t disappoint either.
The biggest challenges that have been hanging over COST are the strength of the dollar and the lack of growth in Europe. The U.S. market was fine, growing net revenue and net earnings at home at a healthy clip.
But this is the cost of growth and diversification. When growth is good, being spread out across markets is a smart way to spread regional risk. But when growth is bad, it means all those markets punish you.
COST Stock’s Challenges
As a U.S.-based firm, the strong dollar is not helping in foreign markets. It means COST is making less on sales in local currencies, since those sales are translated back into dollars, and those currencies are weaker than the dollar.
Outside of the U.S., COST is in Europe (not exactly growing like gangbusters), Mexico (a commodity-based economy that is having trouble because oil and other commodities are at multiyear lows), Puerto Rico, Canada (same problems as Mexico) and Asia (self-explanatory).
Memberships were up, but sales outside the U.S. haven’t added much to the bottom line … yet.
The other headwind the big-box retailer has faced is low energy prices. One of COST’s core revenue generators — in the U.S. in particular — is its fuel business.
Gas stations are generally low-margin businesses, and when prices go down, they have less room to move prices. If volume isn’t increasing, then margins and net revenue suffer.
But none of this is news to analysts or leadership at COST. This has been baked in for most of FY15, and growth expectations have been duly tempered. That’s why its most recent ho-hum numbers didn’t mean the stock sold off; the stock was actually up on the next trading day after its announcement.
The Bright Side for COST
FY16 is shaping up nicely for COST, however.
The dollar is weakening, and when the Fed raises rates, that will help drive down the dollar as well. This will boost earnings from its non-U.S. operations.
Fuel prices have stabilized, and while they’re not rising, they’re also not falling or bouncing all over the place. That will help build a stable strategy moving forward.
And its credit card partnership switch from American Express (AXP) to Visa (V) and Citigroup (C) will also help, because COST will pay significantly less in fees to its new partners.
Like everything in this business, it’s all about low margins and high volume. If Costco can save a few percent or more on credit card fees, that adds up — and it will.
And speaking of fees, COST is planning on raising its membership fees in the U.S. and Mexico in the next year.
Last year, membership fees added about 2% to its revenue base, at about $2.5 billion.
Bottom Line
As growth in the U.S. continues to expand, COST will be a major beneficiary.
As of now, COST operates a large majority of its store in North America: 480 in the U.S. (including Puerto Rico), 89 in Canada and 36 in Mexico.
Beyond North America, it’s just starting to expand: 28 in Europe (27 in the UK, one in Spain), 53 in Asia (23 in Japan, 12 in South Korea and 11 in Taiwan) and seven in Australia.
These markets are all underperformers at this point, so it’s difficult to set expectations too high for these stores yet.
Right now, the key is the U.S. market and growing sales at home.
And COST is well positioned to do that.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
