Costco Wholesale shoots and scores

The warehouse store chain posts impressive gains.

By Jonathan Berr Feb 29, 2012 11:35AM

Costco Wholesale (COST), whose stock has barely budged this year, has defied the skeptics yet again.

Net income for the quarter ended Feb. 12 was $394 million, or 90 cents per share, up 13% from $348 million, or 79 cents, a year earlier. Sales at the Issaquah, Wash., company rose 10% to $22.51 billion, fueled by gains in gasoline sales. The results topped Wall Street's expectations of profit of 87 cents on revenue of $22.83 billion.

Excluding gasoline sales, same-store sales, a key metric, rose 7% in the U.S. and 9% internationally. That tops the recent 1.5% sales gain in Wal-Mart (WMT) stores open at least a year and the 4.4% gain in the current quarter forecast by Target (TGT). There are a few reasons for this outperformance.

First, Costco shoppers tend to be wealthier than shoppers of other stores. As the economy rebounds, these consumers are beginning to ratchet up their spending on discretionary purchases such as home electronics, which Costco sells. The chain also sells supplies to small businesses such as restaurants, whose fortunes also are improving along with the broader economy.

Wall Street, though, thinks Costco is about to run out of gas.

The average one-year price target on the stock is $84.83, above where it recently traded. This makes no sense. Wall Street analysts expect revenue in the quarter to gain 6.7% to $22 billion, beating the 6.1% increase predicted at Wal-Mart and the 3.9% gain forecast for Target.

Costco isn't a typical retailer. Besides selling stuff in bulk, the company also offers a wide variety of goods and services such as travel deals, helps in buying new cars and even caskets. The company is uniquely positioned to benefit from the economic recovery.


Costco shares are not cheap, trading at a forward multiple of 19.47 versus 11.64 for Target and 11.14 for Wal-Mart. Investors should wait for a pullback before adding Costco to their portfolios.

Jonathan Berr is long Target.

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