Costco sales surge in August

The warehouse chain offers a better glimpse into the economy than other retailers.

By Jonathan Berr Aug 30, 2012 7:26PM
Costco (COST), which offers a mind-boggling assortment of merchandise at its more than 600 stores ranging from chocolate cakes the size of your head to dress shirts that Mitt Romney allegedly fancies, is on a roll.

Sales at stores opened at least a year, a key retail metric, surged 6% in August, beating the 4.5% increase that analysts had expected. Net sales were $7.4 billion for the month of August, up 8% year-over-year. Shares of the Issaquah, Wash. company rose on the news.

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Stores in the Midwest, Southeast and San Diego posted strong results, as did locations in Mexico, Canada and Taiwan, according to the company. A wide range of product categories did well ranging from frozen foods to small appliances to hardware. This is good news for a variety of reasons.

Unlike many other chains, Costco caters to both individual consumers, particularly those that are a part of large families, and small businesses. The company has about 10 million paid business members and 26 million gold star members, which tend to be individuals. As of the second quarter, membership renewal rates were about 89%. Given the large quantities people have to purchase, Costco customers have to be among the most confident of consumers.

Wall Street is underestimating Costco's potential for growth, especially since S&P recently announced that it might raise the company's debt rating. The average 52-week price target on the stock is $92.57, ahead where it recently traded. Investors may not be aware of the company's broad appeal. Costco appeals to budget-conscious consumers because its prices on some goods, such as fresh produce, are superior to traditional chains even considering the larger quantities that consumers need to buy.

Other retailers, such as Macy's (M) and Gap (GPS), reported better-than-expected sales, as shoppers were lured by back-to-school promotions. Retailers also may ramp up promotions early for the important holiday season.

Though past performance is no guarantee of future results, Costco should do fine in the coming months. Its strong results also bode well for the reelection of President Barack Obama, whose pathway to victory might be paved by pallets of paper towels and toilet paper.

--Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr.

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