Costco Wholesale Corporation (NASDAQ:COST) continued to report excellent growth in the second quarter of fiscal 2013. It reported a total 8% growth in revenues and approximately 5% growth in like for like sales. The excellent performance was primarily due to inflation in food prices, increase in the membership fee, and new additions of members. It must be noted; increases in personal taxes may have impacted the disposable income of its target customers had little or no impact on sales. Going forward, I expect the retailer to post robust earnings underpinned by hike in the renewal rates, planned international growth, and strong development of the ecommerce channel.
Q2 Fiscal 2013
Second quarter results exhibited strong impact of increased membership rates. The relative revenue (same quarter previous year) figure was up by 15%, as the total revenue for the second quarter piled up to approximately $530 million. The customer base witnessed a rapid increase as the retailer added 900K new members underpinned by increase in the price of gasoline. The average revenue per unit remained steady over the last few years; hence the new member additions bolstered the like for like sales to great degree. Furthermore, grocery sales that contribute nearly 50% to the overall revenues grew considerably due to inflation of food prices.
What Should Investors Expect?
Increase in Renewal Rates –
Increase in membership renewal rates in spite of hike in membership fee is a positive sign for the company and a strong indicator of consumer confidence. The renewal rates in North America during the first quarter were downright flat at 89.7%, nonetheless second quarter saw a slight growth at 89.8%. Similarly, international markets also witnessed growth in the second quarter. The growth is expected to incrementally develop as the warehouse shopping culture continues to expand.
Executive members account for roughly 33% of the total customer base, however it must be noted they contribute 66% to the overall revenues for Costco Wholesale Corporation (NASDAQ:COST). During the second quarter the base for normal members grew by 1% in contrast to executive members that notched a 1.4% increase. The trend of growth seen in executive members is expected to gather more momentum, as Costco has increased the annual rewards on purchases.
Private Label Brands- Private label brands such as Kirkland Signature are increasing in popularity, as the merchandise offered is high value for money and at par with any other national brand in terms of quality. The retailer is determined on increasing revenue share from this business segment. During the second quarter of fiscal 2013, small private labels contributed roughly one fifth to the overall merchandise offered by Costco Wholesale Corporation (NASDAQ:COST).
International Expansion to Fuel more Growth – It must be highlighted Costco has registered a15% growth internationally, relative to US that grew by 5% during the last four years. The latest quarterly results exhibited an encouraging growth from the Asian and Australian region. Costco only launched one store in Asia during the last quarter; nonetheless the performance was excellent compelling Costco into opening six new stores by the end of this fiscal year. The slow growth in US has led Costco Wholesale Corporation (NASDAQ:COST) into focusing more on international growth as the retailers plans to launch 14 new stores by the end of this year. However, out of 14 only four stores are planned for US.
Brief Competitor Analysis
Costco competes directly with Wal-Mart Stores, Inc. (NYSE:WMT)’s Sam’s Club in the domestic market. Sam’s club contributes approximately 12% to the total revenues of Wal-Mart Stores, Inc. (NYSE:WMT). It offers a large variety of goods including both hard and soft goods, in addition to several grocery items. Like Costco, it charges a membership fee, however its prime consumers purchase in large volumes hence it still provides high value for money. This business unit capitalizes vastly on the massive bargaining power of Wal-Mart Stores, Inc. (NYSE:WMT), which enables it to offer a large variety of goods to its consumers at cheap prices. Moreover, the entire business model is highly distinctive and contemporary with not many players competing in this space.
Why Should you Buy this Stock?
In addition to several growing prospects that Costco Wholesale Corporation (NASDAQ:COST) enjoys, investors must realize it has a unique business model and probably will benefit from large international acceptance. Costco currently operates more ware house stores in US; however going forward international expansion offers a huge opportunity. Furthermore, the company is focused on increasing the executive member base, which implies a higher revenue volume and membership renewals.
The company recently turned its attention to improve the ecommerce platform, as it completely comprehends the opportunity it presents. Costco swanks, approximately 90% of its merchandise offered on the ecommerce platform is different from store offerings. Hence, the company does not worry about any probability of sales cannibalization. I believe, Costco Wholesale Corporation (NASDAQ:COST) has strong fundamentals and promises robust pay-outs in the future.
The article Why You Should Buy Costco? originally appeared on Fool.com and is written by Ashit Gulati.
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