With a market meltdown in the works in America and Europe, shrewd investors are slowly but surely shifting their portfolios towards defensive, recession-proof plays with slower growth and dumping positions in high beta momentum plays. Last week, we saw a big capitulation in momentum stocks, especially in the tech sector, while defensive plays such as McDonald’s (MCD: Charts, News, Offers), Wal-Mart (WMT: Charts, News, Offers), Kimberly Clark (KMB: Charts, News, Offers) and Target (TGT: Charts, News, Offers) held steady. While defensive stocks traditionally have slower growth with a focus on dividends, wholesale superstore Costco (COST: Charts, News, Offers) provides a good balance between the two. Although Costco missed analysts’ estimates in the third quarter, reporting 73 cents per share when the market expected 77 cents, same store sales have steadily increased in the last quarter. For the fourth quarter, the company missed analyst estimates again, albeit by a much smaller margin – $1.08 vs. the consensus estimate of $1.07. Its fourth quarter earnings, however, were a significant 11.3% increase over the prior year quarter’s earnings.
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Revenue has increased steadily from $60.1 billion in 2006 to $77.9 billion in 2010. Costco’s revenue, which increased 16.9% in the fourth quarter to $28.18 billion, is calculated by combining its net sales with its membership fees. For the fourth quarter, the company increased its net sales 16.9% to $27.59 billion, slightly missing the consensus estimate of $27.89 billion. The company’s membership fees increased 10.7% to $590 million. Costco announced that it would increase the majority of North American annual membership fees from $50 to $55, executive memberships will increase from $100 to $110, and the highest level executive memberships will increase from $500 to $750. These changes are expected to go into effect on November 1, 2011.
Same store sales in September rose 12% – 11% in the United States and 14% at its international locations. For the fourth quarter, same-store sales rose 12% – 10% in the United States and 19% in its international locations. Same store sales results were favorably impacted by a weakened U.S. dollar and rising gasoline prices, and contributions from the company’s Mexican joint venture. Operating margins eroded slightly by 20 basis points to 2.7%. Costco uses the same low-margin high-volume business model as Wal-Mart and its wholesale unit, Sam’s Club.
Earnings have also steadily increased, from $2.30 per share in 2006 to $2.92 per share in 2010. The company is forecast report earnings of $3.20 per share for fiscal 2011. The company has also decreased its outstanding shares from 480 million in 2006 to 446 million in 2010, and is expected to reduce shares further to 443 by the end of fiscal 2011.
While these metrics are not indicative of rapid growth, Costco shares have more than tripled since 2002. In the same time frame, shares of Wal-Mart have gone nowhere while shares of Target have increased 70%. To be fair, Wal-Mart’s market cap of $182 billion dwarfs Costco and Target’s respective market caps of $35.7 billion and $33.4 billion, and the company experienced most of its growth in the 1990s. By comparison, Costco still has room to grow – with only 592 warehouses in operation, with 429 in the United States, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 9 in Japan, 8 in Taiwan, 7 in Korea and 3 in Australia. Costco finished the year with $4 billion in cash and long-term debt of $1.25 billion.
Costco’s slow and steady expansion into international markets makes it well poised to capitalize on further weakness in the U.S. dollar and strength in emerging markets. If the dreaded double-dip recession does indeed hit, then Costco well also be well positioned to capitalize on consumers stocking up on goods at wholesale prices. In addition, the company pays a 24 cent quarterly dividend, which has been steadily increased ever since 2004.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
