Costco - Stores Are More Attractive Than The Shares

| About: Costco Wholesale (COST)

Shares of Costco Wholesale (COST) rose 1.9% in Wednesday's trading session. The large wholesaler offering products at discount prices reported its fourth quarter results for its fiscal 2012.

Fourth Quarter Results

Costco reported fourth quarter revenues of $32.2 billion, up 14% on the year. On average, analysts expected Costco to reported revenues of $31.7 billion. Costco's final quarter lasted 17 weeks.

The company reported comparable sales growth rates of 5%. Growth was driven by a 6% increase in sales in the US, and 2% internationally. Sales were driven by the fact that the fourth quarter had 17 weeks, compared to 16 weeks last year. Excluding this effect, nominal sales were up 5%. Growth was driven by a 4.5% increase in traffic, while the number of transactions remained stable.

The company reported net income of $609 million, compared to $478 million for the final quarter in 2011. Earnings per diluted share rose 29% to $1.39 per share. On average, analysts expected Costco to earn $1.31 per share.

This year's earnings were impacted by a pre-tax LIFO charge of $0.02 per share, more than offset by a $0.04 benefit of increased membership fees. A strong dollar impacted the bottom line by $0.03 per share. The impact of having an extra week in the quarter added $0.08 per share to the bottom line.

The company operates with 608 warehouses at the moment, of which 439 are located in the US and Puerto Rico. The company intends to open 14 new warehouses in the remainder of the calendar year of 2012. So far, the company opened 16 new stores during the year, of which 10 in the United States.

During its fiscal 2012, Costco repurchased 7.3 million shares at an average price of $84.75, for a total of $617 million.


Costco ended its fourth quarter with $4.9 billion in cash, equivalents and short term investments. The company operates with $1.4 billion in short and long term debt, for a net cash position of $3.5 billion.

For its fiscal year of 2012, Costco generated revenues of $99.1 billion. The company reported full year earnings of $1.71 billion, or $3.89 per diluted share.

The market currently values Costco at $42.2 billion. This values the operating assets at $38.7 billion. This values Costco at 0.4 times annual revenues, and 23 times annual earnings.

Currently, Costco pays a quarterly dividend of $0.28 per share, for an annual dividend yield of 1.1%.

Investment Thesis

Year to date, shares of Costco have risen some 17%. Shares rose from $80 in January to peak at $105 in September. Shares fell 4% over the past week, now exchanging hands at $97 per share.

Over the past five years, shares have risen some 45%. Shares traded as low as $40 in 2009 and steadily rose to all time highs of $100 at the moment. Between 2009 and 2012 the company grew its annual revenues from $71.4 billion to $99.1 billion. Net income rose from $1.1 billion to $1.7 billion in the meantime.

Costco enters its fiscal 2013 full of confidence. The company plans to open 27 to 30 new locations, of which roughly half in the US. As such, the total store count will increase by some 5%. Given that an average Costco store generated annual sales of $154 million, the new openings will boost annual revenues by roughly $4 billion per annum.

Costco is a great company. The company has a rock-solid balance sheet, decent same store sales growth and a decent international expansion plan. Valued at 23 times earnings, there is little room for capital gains from a valuation perspective. Shareholders can only see decent capital gains if the company can boost its margins or boost store openings in the short run, both not very likely.

Shares are simply valued too rich at the moment. I see few short term upside triggers for shares and therefore remain on the sidelines. There are no compelling reasons to initiate a short position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.