Avoiding Costco Despite Holidy Pickup

Whether you were shopping for Christmas or at an after Christmas sale, or just driving by a mall, you probably noticed that this year's Christmas sale was different; it was much more crowded. Maybe you did not even get a parking spot at the mall. I had similar experiences this season, even at the after Christmas sales. And just look at the amount of gift card exchanges that are happening on the internet. All this makes you wonder whether retailers are going to cut it this season. One of the retailers that is getting good attention is the warehouse retail giant, Costco (COST).

Costco seemed happy with the sales during the holiday season. The company's CFO, Richard Galanti, said:

Generally speaking, our season went well. We were left pretty clean in terms of seasonal markdowns. On the food and sundry side, items that were strong were high-end chocolate gift packs and high-end nut gifts packs. All of our seasonal gift packs sold through pretty well.

Company Profile

Costco Wholesale Corporation operates membership warehouses, which offer a selection of branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities. As of September 2, 2007, Costco operated 488 warehouses comprising 379 in the United States and 4 in Puerto Rico; 71 in Canada; 19 in the United Kingdom; 6 in Japan; 5 in Korea; and 4 in Taiwan. The company also offers its products through Web sites www.costco.com in the U.S. and www.costco.ca in Canada.

Costco was founded in 1976 and is based in Issaquah, Washington.

Fundamental Analysis

The following reports are as of September 30th 2007 results.

Financial Health

• Current Ratio = Current Assets/Current Liabilities = 1.06
• Total Liabilities/EBITDA Ratio = 5.83
• Total Liabilities/Operating Cashflow = 2.81
• Total Liability/Share-holder equity = 1.4
• Total Liability/Total Assets = 0.58

Costco is managing their balance sheet well.

Profitability

• TTM Sales growth: 2.57%
• Last year Sales growth: 7.06%
• Latest Qtr over year ago Quarter sales growth: 11.7%
• TTM Operating Margin improvement: 0.02%
• TTM Return on Asset: 5.27%
• Last 2 year Gross Margin: 12.3%
• TTM Gross Margin: 12.4%
• Last 2 years Net Margin: 1.8%
• TTM Net Margin: 1.7%

Slowdown in the sales growth is evident in the numbers above. And there is hardly any improvement in the margins either, indicating a tough environment for retailers. This is in line with Target's (TGT) warning that its same store sales could decline in December. Similarly MasterCard (MA) Advisor's consumer spending came in at the lower end of the expectations at 3.6%, as opposed to 6.6% last year. Since Costco also caters to high end customers, the consumer slowdown could affect Costco to a lesser extent. Besides, Costco sales benefited extra from international sales due to a weaker dollar.

Analysts Rating

• Strong Buys: 2
• Buys: 2
• Hold: 10
• Sell: 0

Analysts are not very keen on Costco at this time.

Competition

Wal-Mart (WMT) had a better than expected November same store sales growth at 1.5% as opposed to expected 1.2%. Gross margins and Operating margins for Wal-Mart is much better than Costco's. One of the main areas where Coscto holds up is in the relative strength area and hence the stock price action.

Weakness/Threats

Slowing consumer expenditure is hitting Costco as like any other retailers.

Technical Analysis

Notice the declining MACD tops.

My Bottomline

I would avoid any retailer at this time, both as a value investor and as a growth investor. As a value investor, I can get better value in the future and hence I would avoid. As a growth investor, I see that growth is slowing down and hence I would avoid. If I am feeling extra adventurous, then my engagement would be brief and very little. However, the story of entertainment software and hardware retailers may have been different this season.

Disclosure: none

Comments

[Tom B:]

I like Costco as a customer. The low dividend yield has kept me from buying. They aren't really a serious growth play.

2007 Dec 29 10:53 PM