Costco Wholesale Corporation (COST): Why This Retailer Is Outperforming

Costco Wholesale Corporation (NASDAQ:COST) is, of course, not alone in many of these activities but it compares very well across the sector because it does all of them well. For example Lowe’s Companies, Inc. (NYSE:LOW) has an ongoing plan to reset its product lineups in order to reduce SKUs and ‘normalize inventory.’ While this may appear routine stuff, Costco has been doing it well for years while Lowe’s has had to adjust because it wasn’t doing it well. With that said, Lowe’s actually has some upside potential from successful execution of this plan.

Moreover, Lowe’s (and The Home Depot, Inc. (NYSE:HD) for that matter) both reported that outdoor and garden items were a bit soft in the last quarter thanks to the late spring. In comparison Costco cited these categories as being strong.

Whither Wal-Mart Stores, Inc. (NYSE:WMT)?

Costco isn’t alone in its membership fee model as BJ Wholesale and Wal-Mart Stores, Inc. (NYSE:WMT)’s Sam’s Club also take membership. Wal-Mart is following Costco by increasing its membership fee but its execution is nowhere near Costco. For example its comparable sales growth (ex fuel) was only up .2% in the last quarter with traffic up 1.3% compared to Costco’s 4.5%. In addition its ticket value was down 1.1% while Costco’s was flat.

So while the economic environment is difficult and Wal-Mart on the whole has been a bit disappointing (a net sales increase of only 1.8% in the last quarter), Costco Wholesale Corporation (NASDAQ:COST) has outperformed, particularly against Sam’s Club.

The bottom line

In conclusion, while something like Wal-Mart is largely a play on the economic environment, Costco has demonstrated that its superior performance can justify an evaluation premium over Wal-Mart. The problem is that it will be pressured to continue this execution in order to be rewarded by the market. Any slip-up and/or step-up in competition from Target Corporation (NYSE:TGT) or Wal-Mart and its current PE of 24x will start to get hard to justify.

The article Why This Retailer Is Outperforming originally appeared on Fool.com and is written by Lee Samaha.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and Lowe’s. The Motley Fool owns shares of Costco Wholesale. Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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