Warehouse retailer Costco Wholesale Corporation (NASDAQ:COST) reported its second-quarter earnings with growth in both top line and bottom line. Elevated membership fees with new members signing up helped the company improve its revenue. Costco’s low margins have proved beneficial for customers, and it has also kept investors happy, by providing a return of more than 110 times in the last 20 years. The company’s stock is almost at its all-time high so let’s see whether it’s still worth a buy.
A peek into the numbers
Costco Wholesale Corporation (NASDAQ:COST) reported revenue of $24.87 billion, 8.3% higher compared to $22.97 billion in the same period last year. EPS excluding one-time items grew 22% year-over-year to $1.10 a share. The surge in the top line and the bottom line both can be accredited to 900,000 new membership signups and a consistent membership renewal rate of 89.8% in North America and 86.5% in international markets.
Moreover, despite hike in the fees, there has been a consistent membership renewal, and new members are regularly signing up, which shows their faith in Costco as a brand. Furthermore, the number of Executive members, who pay $110 as membership fees in contrast to other members paying $55, has risen from 33% in fiscal 2009 to 38% in fiscal 2012.
The Executive members get 2% or maximum of $750 annual rewards on their purchases. They embody a third of the company’s clientele in general, but account for two-third of its revenues. The reward ceiling was recently raised to $750 from $500. This added benefit has added a segment of consumers which should eventually help the revenue move north.
Membership fees provide about 97% of Costco’s income in the second quarter, and thus contribute almost the entire earnings of the company. The silver lining is that it has surged 15% in the current quarter on comparative basis which is a motivating factor.
Additional benefit
The retail industry was expected to be battered because of the increase in payroll taxes, but as Costco Wholesale Corporation (NASDAQ:COST) gratify to middle and upper income consumers its sales will not be affected much. Its private labels, which are of almost of the same quality as other national brands but mostly more pocket friendly are getting better recognition, which is evident from the fact that they account for 20% of Costco’s total products. These brands are growing in the range of 0.5% – 0.75% annually.
The company has grown considerably in the international market over the last few years. Australia and Asia have seen new members signing up and the performance of these stores have been heartening. Costco plans to add six new stores in Asia over the next two quarters which I believe is a good logical move.
Further, the retailer has been smart in keeping a distinguishable inventory for its ecommerce and stores. A non overlapping inventory to the extent of 80% helps the company to operate both the channels without competing with each other’s sales.
The company has a strong balance sheet with its cash flows essentially dependable. Though the current dividend yield of Costco Wholesale Corporation (NASDAQ:COST) is 1.1%, its recent $3 billion spent as special dividend of $7 a share last year will definitely boost investor’s sentiments. Moreover, its upside on stock prices has always been the reason of keeping investors attracted towards it. I would recommend a HOLD for the stocks of the company with another 10% upside in the next couple of quarters.
Another success story
Wal-Mart Stores, Inc. (NYSE:WMT) is the biggest name in the retail business in the United States. It operates in over 25 countries with over 10,000 retail stores. The company reported revenue of $469 billion for the fiscal 2013, an increase of 5% over last year. It reported earnings of $5.02 per share in 2013 results which is expected to grow on an average of 5% to an average $5.30 a share this year.
Not only has it delivered results, it has kept investors pleased throughout, and has returned a lot of cash consistently over time. Its current dividend yield is around 2.6% and it paid $13 billion to its shareholders in dividends and share buybacks. In order to add to its investors contentment the company has announced an 18% hike in its dividend for 2014.
The company has faced certain issues in the last year such as bribery allegations in Brazil, China, and India and protests from its employees for ill-treatment. Further, there are concerns over the sluggish growth rate in China and the new signs of Europe’s economic weakness that can affect the company’s growth uptrend.
The investors should not be too worried about their investments as Wal-Mart Stores, Inc. (NYSE:WMT) has historically managed to rebound from any negative development very well, and its diversified operation will further act as a cushion for it. I believe this is a solid investment for investors who are seeking a regular income source rather than a major capital gain.
A peep into Target (NYSE:TGT)
Target Corporation (NYSE:TGT) is the second largest discount retailer in the United States. It’s recently reported earnings were nothing to be happy about with profits reducing 2% to $961 million compared to the same period last year. The company’s performance suffered as the gift items were not able to produce the desired results and the discounts offered, particularly in the holiday season, pushed margins lower.
Target has plans such as letting its customers pay online and collect in-store, same day delivery, like Wal-Mart Stores, Inc. (NYSE:WMT), and meeting to needs of shoppers using mobile phones. The company’s main medium to grow this year is its maneuvers in Canada, where it anticipates superior margins. Moving forward, Target will be giving its credit card portfolio to Toronto Dominion Bank and come up with 124 new stores in Canada. This should help the company to improve its top and bottom line.
Final words
Costco Wholesale Corporation (NASDAQ:COST) is the best pick going forward at the moment, as its performance in foreign markets has been good, and its business model of charging members upfront provides certainty to its income stream. Wal-Mart Stores, Inc. (NYSE:WMT) too is a good pick at its current prices because of its large scale of operations and a diversified business structure. Target too is a good hold and should tap in benefit from its Canadian operations. However, I do not recommend investors to buy Target now.
The article The Right Retail Stocks to Buy originally appeared on Fool.com and is written by Tarun Bachhawat.
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