No cheaper shot at Costco

Missed expectations at the discount retailer? No problem.

By Motley Fool Pick of the Day Dec 8, 2011 5:25PM
Image: Man shopping (© Noel Hendrickson/Getty Images/Getty Images)By Alyce Lomax

 

Costco (COST) is impervious to negativity. Although the discount retailer missed analysts' expectations, investors are taking the news in stride. Anybody who was waiting for a temporary plunge in the stock price in order to take a position will have to wait a little longer.

 

Fiscal first-quarter net income inched 2.6% higher to $320 million, or 73 cents per share, including charges related to settling an income tax audit related to its Mexican joint venture and a contribution to a coalition supporting the reform of alcoholic beverage laws in Washington state; combined, these charges dinged earnings by about 7 cents per share.

 

Net sales surged an impressive 13% to $21.18 billion, with same-store sales increasing by 10%. Excluding the effects of gas price inflation and foreign currencies, comps increased 7%.

 

Although shrinking margins contributed to profit falling short of analysts' expectations, maybe the reason investors are taking the news in stride is the fact that the sales increases are impressive in the current environment. Despite the fact that Costco recently raised its membership fees, it doesn't look like it's pulling a Netflix and alienating loyal customers, since membership fee revenue increased by 7.5%. While this is below the 10% fee hike, it is near enough that I don't worry about an exodus of customers.

 

Costco is one of the strongest retailers out there; that's one of many reasons I purchased the stock for the Rising Star portfolio I'm managing for Fool.com. It's also a longtime Motley Fool newsletter service favorite.

 

Clearly Costco is holding its own in this difficult, highly competitive retail environment against low-priced rivals such as Wal-Mart (WMT), Best Buy (BBY), Target (TGT), and Big Lots (BIG). Costco was a major winner among the retailers that reported November same-store sales last week, too; its comps increased 9%, while Target's jumped just 1.8% and J.C. Penney's (JCP) fell 2%.

 

If some investors were secretly hoping for a big miss so they could grab a stake at a better price, there's no such cheap shot at Costco right now. The stock is trading at 20 times forward earnings, quite higher than big-box peers such as Wal-Mart, Target, and Best Buy. However, Costco's an exemplary company, renowned for growth and execution, so it's still worth the premium price.

 

Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of Costco Wholesale, Wal-Mart Stores, and Best Buy. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Costco Wholesale, and Netflix. Motley Fool newsletter services have recommended writing covered calls in Best Buy. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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