Costco Wholesale Corporation – Strong margins and international growth September 20, 2019 154

  • Costco (COST) will be able ride on its loyal customer base (~90% renewal rate), global growth opportunity (average 5% constant-currency growth YoY), strong gross margins (average of 13% for the past 10 years) and continued expansion of its store base.
  • Robust international comps.
  • Strong comps for major product categories.
  • We have a TECHNICAL BUY rating for COST.

 

Description

Costco Wholesale Corporation operates wholesale membership warehouses in multiple countries. The Company sells all kinds of food, automotive supplies, toys, hardware, sporting goods, jewellery, electronics, apparel, health, and beauty aids, as well as other goods.[1]

 

Investment Rationale

Costco (COST) will be able ride on its loyal customer base (~90% renewal rate), global growth opportunity (average 5% constant-currency growth YoY), strong gross margins (average of 13% for the past 10 years) and continued expansion of its store base. Given its improved Visa credit card offering and online presence, we believe it is a great opportunity to own COST.

 

Robust international comps. COST’s core US Same Store Sales (SSS) was up 5.9% YoY which was above the 5.3% YoY in July and June each. The strong comps was mainly due to strong consumer spending in the Midwest, Texas and Los Angeles. Canada’s SSS (in constant currency terms) outperformed market expectations and was up 6.1% YoY (July: 5.4% and June: 4.3%), while other internationals’ SSS (in constant currency terms) was up 5.9% YoY (July: 4.0% and June: 5.5%). Spain, Taiwan and Mexico were the stand-out performers in August (July & June: Taiwan, Japan, and Mexico). We think COST demonstrates its operational excellence from the monthly comps. We expect the warehouse club to sail on the trend of strong consumer confidence and retail spending.

 

Strong comps for major product categories. From a category perspective, comps for all major categories have growth in the mid-single-digits except softlines (eg. textile merchandise) which grew low-single-digits. Comps for food and sundries were in line with July, led by candy, deli and liquor. Hardlines (e.g. furniture, sports equipment) were in the high-single-digits with strength in automotive, majors and sporting goods.

 

RECOMMENDATION

We have a TECHNICAL BUY rating for COST. COST is currently trading at a P/E ratio of 35.8, near its 10 year +1 S.D. However, we believe the multiple of COST is justified due to its defensive nature, strong comps and growth opportunities in the international market.

[1] Source: Bloomberg

 

 

Click to enlarge

Support 1: 279.75                  Resistance 1:307.63

Support 2: 245.41                                                  

 

Based on out technical analysis, COST’s strong bullish sentiment will most likely result in prices breaking new high:

  • Strong area of demand (189.51 – 307.63) near the 23.6% Fibonacci retracement level.
  • Immediate uptrend line is intact.
  • 22 SMA crosses above the 50SMA, forming a short term moving average cross.
  • 200 SMA has a strong trend upwards.

 

CHART LEGENDS

———— 200 periods MA

———— 50 periods MA

————  22 periods MA

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