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COSTCO (COST)
Costco's 4Q Profit Takes a Hit
Once upon a time, before the prolonged recession began, people use to love these well-known warehouse retailers such as Sam's Club, BJ's, and Costco. Something about buying enough mayonnaise to feed an army or a small family for years was appealing. When the stability of the economy came into question, people took a step back and starting thinking much harder about purchases. As a result, some of these once thriving companies started to feel the pressure. Consumers are starting to return to the market, but Costco's recent earnings report showed some areas of concern. The company reported that fiscal fourth-quarter earnings dropped 6%. What were some of the issues that caused this decline? Can the retailer compete with popular discount stores?
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One thing is crystal clear; retailers have really taken a beating ever since the economy took a turn for the worse. Some have lost millions of dollars and some have actually had to close up shop. Costco has had its share of ups and down, but lately sales have been mostly down. The decline in sales has been attributed to many different reasons, but some are more obvious than others. Costco's core audience is made up of regular consumers and a lot of small businesses. Both of these groups have been forced to consolidate and conserve funds to cope with rising expenses. This has caused much less foot traffic and less demand for the wide range of products that the store offers. Another factor contributing to the decline in the fourth quarter was a drop in gas prices. A large percentage of Costco's stores also provide fueling stations for its members. When gas prices were skyrocketing, the company saw sales increase with prices. Costco's gas prices are typically a few cents less than prices at other gas stations, so the appeal to consumers was definitely there. Now that gas prices are fairly cheap all over, the company can't use gas sales as a crutch.
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One of the biggest issues is the growing competition that Costco is facing. One of its main rivals, BJ Wholesale Corp. (BJ: Charts, News, Offers), has continued to do fairly well in terms of sales during the recession. Costco is running neck and neck with other retail powerhouses such as Target (TGT: Charts, News, Offers) and Wal-Mart (WMT: Charts, News, Offers). These stores may not offer items in bulk, but they do have the types of prices that keep consumers coming back. Costco still offers some great deals on certain items, so they may need to evaluate expanding these discounts to cover a broader range of items.
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To give the company some credit, the earnings were able to top Wall Street's expectations. Topping estimates will be much harder to accomplish if sales continue on this downward spiral. Costco may be able to increase sales in the coming months if they are able to offer some holiday specials that entice consumers. Gas prices are expected to continue declining, so the company can't really depend on this sector as a reliable source for revenue growth. According to recent reports, retailers shouldn't bank too much on holiday sales because they are expected to be dismal once again. Whatever the case may be, Costco must figure out some way to increase sales or earnings will start backpedaling.
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Related to Costco
Costco auditor charged with theft -- A Costco employee has been charged with filing more than $50,000 in fraudulent work-related expenses.
Signs Of A Turn at Costco -- The warehouse club retailer may finally be turning the corner.
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