Is Costco Worth Going To?

Costco Wholesale Corporation (COST) announced second quarter ended February 14, 2016 total revenue of $28.2 billion, down 2.6 percent year-over-year from $27.5 billion during the same period last year.

Costco declared second quarter of 2016 net income of $546 million or $1.24 per diluted share, down 8.7 percent year-over-year from $598 million or $1.35 per diluted share in second quarter of 2015.

Facing weakness

The global retailer reported continued decline in both its top and bottom lines primarily due to the significant gains received last year from an attractive cash dividend and somewhat offset by tax charge linked to the continuing income tax issue.

Costco is believed to be the 2nd biggest global retailer and holding 18th position in Fortune 500 largest global companies with approximately $65 billion of market capital.
Costco Today achieved fiscal year 2015 consolidated sales of $113.7 billion, recording over 2.45 million transactions per day and about 3,500 transactions per whse per day.

The wholesale corporation, Costco Today has nearly 698 warehouses globally including, 488 in the US, 90 in CN, 36 in Mexico, UK having 27 warehouses in addition to Japan, Korea, Taiwan, Australia and Spain each having 24, 12, 11,8 and 2 warehouses respectively.

The hugely popular global retailing chain is expected to drive solid long-term profitability, being primarily supported by its huge size which allows it to pass on the cost benefits to the end consumers while recording impressive margins and encouraging it to increasingly setup and grow new stores worldwide.

Costco announced second quarter of 2016 total sales of $8.28 billion, up one percent year-over-year from $8.18 billion of net sales in second quarter of 2015.

Focus on operations

At present, Costco runs 698 warehouses that include 488 in Puerto Rico and the US, 90 operating in Canada, 36 functioning in Mexico, 27 running in the UK, 24 operational in Japan, 12 at work in Korea, 11 functioning in Taiwan, eight running in Australia and two at work in Spain. Further, Costco also functions e-commerce web sites in the United Kingdom, the U.S., Mexico, Canada, Taiwan and Korea.

The impressively wide and growing global warehouse network of Costco has specifically allowed the company to grow its year-over-year sales and it’s believed to drive solid long-term profitability for the international warehousing and retailing company.

Importantly, The Board of Directors at Costco recently announced an attractive cash dividend on its common stock for the quarter of about $.40 per share payable February 26, 2016 to all the key stakeholders of the company as of February 12, 2016. During May 2004, Costco started the dividend payment at $0.40 per year and presently returning the invested capital at a rate of $1.60 per year, thus achieving a growth rate of 13% per year and making total dividend payment for the complete fiscal year 2015 of $664 million and in line with Costco’s continued commitment to deliver attractive shareholder returns.

Costco initiated a strategic stock repurchase program in fiscal year 2005 with net spending of $7.5 billion till date. The management has retired a net of 121.6 million shares at an average cost per share of $61.54 and still, having $3.6 billion of remaining share buyback authorization. Going forward, Costco projects to open a total of 30 new retail stores in 2016 with over 30 fresh stores expected to be introduced over the fiscal years 2017 till 2021.

Costco is observed to be having a record history of returning impressive shareholder returns in form of dividend or timely share repurchases  which highlights the company’s notably healthy operations and this superior trend is estimated to increasingly attract more strategic shareholders to invest into the company.

The global variety stores are continuing to deliver a solid 6% expansion in 2015 and thus, surpassing the annual performance of mixed dealer channel that illustrated a growth of 1%. This outstanding worldwide expansion of variety stores is mainly due to attractive offerings of key grocery products at much lower prices in such outlets.

Costco has a leading market share among the mixed retailers during 2015 with an attractive market share of 17% and slightly better than the percentage market share of Wal-Mart Stores, primarily driven by greater customer traffic at Costco’s stores and industry-leading value per deal during 2015 owing to greater inventory accessible through both the company’s digital selling platform and new stores.

The international merchandising company is expected to continue to lead all other key players in this space and primarily helped by its strategic growth initiatives through expanding the store count globally and offering differentiated products at competitive pricing.

Conclusion

Overall, the investors are advised to “Buy” equity in Costco Wholesale Corporation considering the company’s logical valuation level with trailing P/E and forward P/E ratios of 28.26 and 24.74 respectively, comparable to the industry’s average P/E of 28.39. The PEG ratio of 3.19 signifies healthy company growth and somewhat better than the industry’s growth average of 1.64. The profit margin of 2.03% seems satisfactory. Moreover, Costco is cash-rich with significant total cash of $6.28 billion against smaller total debt position of $6.13 billion, encouraging the company to make future growth investments.
Published on Mar 10, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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