Once a favorite son of retail investors, Costco (COST) not only offered cash-strapped consumers a way to save big bucks during the economic downturn, but the stock also acted as the de facto place to be in as the warehouse discounter space. The company, along with discount retail competitors Walmart (WMT) and BJ’s Wholesale Club (BJ) managed to weather last year’s economic storm much better than most retailers. But now economic conditions have changed immensely, and the question here is will shoppers keep ringing Costco’s register? More importantly, will investors still want to embrace COST stock? The answer is yes, and here are five reasons why.
Costco posts strong Q3 revenues and profit –
On May 27, Costco reported fiscal third-quarter profit that jumped 46% year-over-year. The company said strong demand from international units, including Canada and Taiwan, helped fuel the stellar revenue during the quarter, as did sales of nonessential products such as apparel and home furnishings. Also in that fiscal Q3 report, the company bested Wall Street expectations by reporting third-quarter net income of $306 million, or 68 cents per diluted share, which is a big leap from the $210 million, or 48 cents per share a year earlier. Analysts polled by Thomson Reuters First Call expected third-quarter earnings of only 66 cents per.
Booming Costco same-store sales. In Q3, Costco said that U.S. same-store sales, the key retail metric measuring sales at stores open at least a year, rose 6%. International same-store sales rose a whopping 26%, and the total same-store sales increase was 10%. That kind of chain-wide double-digit percentage gain is fantastic, and it shows consumers still are looking for value.
Costco sees strong international growth – 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%, and we saw that international same-store sales figure come in another 26% in Q3. 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.
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 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, and the figure jumped again in Q3 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.
