83% more per store than Sam's and 160% more than BJ's must lead to some economic advantages, and they think those advantages will be manifest as continued improvement in ROIs in coming years. Those better ROIs should, in turn, lead to richer valuations.
The business should be more profitable, too: customer abuse of a too-generous merchandise returns policy may have masked significant business improvements in the last year... but likely won't going forward. Gasoline margins should become less of an issue near-term and going forward as well. Earnings in the current quarter and the coming year could easily be a little better than the consensus expectations.
The current quarter's earnings could easily exceed the consensus... and "guidance," too, one reason being the widespread "understanding" that last year's "extra" week accounted for 1/17 (roughly $0.04) of last year's $0.75 EPS. It is less widely recognized, however, that 4Q06 was a lousy quarter, with operating profit up 10% on a 19% increase in sales,even though 4Q05 was a lousy quarter as well, especially considering the "extra" $0.04 from the "extra" week. Poor closing quarter profitability is best reflected in the poor gross margin remained... which the firm expects should improve, at least a little, in the current quarter.
A continuation of stronger than direct competitors' comp store sales, along with enhanced dominance of its geographic markets and the "markets" for real estate, merchandise, and so on, could result, over time, in higher and more predictable returns on investment, higher returns that would justify continued and, perhaps even more rapid investment and, of course, faster growth. Firm expects all of these things... and continued share retirements. Reiterates Buy.
Notablecalls: Nice call. Nice chart. Expect to see some upside in COST.
COST 1-yr chart: