After facing a slowdown in sales growth during 2016, comp sales trends began to strengthen at Costco Wholesale (NASDAQ: COST) last spring. In the last few months, Costco's momentum has increased.
Indeed, for the first quarter of fiscal 2018 -- a period running from early September to late November -- Costco reported stellar comp sales growth of 10.5% (or 7.9% excluding the positive impact of gasoline price inflation and exchange rate fluctuations). This helped the company achieve a 16% increase in earnings per share.
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Earlier this week, Costco Wholesale reported that comp sales growth continued at a strong pace in December. This news is yet another piece of evidence that Costco's recent uptick in sales growth represents more than just a blip on the radar.
Strong sales trends continue
In November, Costco had the best monthly sales performance of its nascent recovery. Comp sales increased 10.8% (or 7.9% adjusted for gas prices and exchange rates), with broad-based strength across the U.S., Canada, and other international markets.
These robust trends continued in December. For the five-week retail month, Costco's comp sales increased 11.5%, or 8.8% adjusted for gas prices and exchange rates.
To be fair, Costco received a roughly 2.5 percentage point comp sales boost last month from the timing of New Year's Day, which added an extra selling day in the period relative to the prior year. Even so, Costco's fully adjusted comp sales growth of 6.3% is very strong by any standard. It's also right in line with the first-quarter trend, adjusted for the timing of Thanksgiving weekend relative to the retail calendar.
Hardlines continued to be the top-performing merchandise category last month, with double-digit comp sales growth. Sales of appliances and computers (including tablets) were particularly strong. Fresh food and other grocery-type items performed well, too, with comp sales up in the high single-digit range.
E-commerce also remained a standout last month, with comp sales growth continuing to exceed 30%.
Strength across the world
Another encouraging sign for Costco is that comp sales growth remains strong in all regions of the world. For the month of December, comp sales (adjusted for gasoline prices and currency fluctuations) rose 9.1% in the U.S., 6.1% in Canada, and 9.6% in the rest of the world.
Cannibalization related to new warehouses opening near existing ones reduced comp sales growth by about 1.5 percentage points in Canada and Costco's other international markets last month, and had a smaller impact in the U.S. The strongest comp sales growth came in Japan, Mexico, and the U.K.
Analysts are still underestimating Costco's strength
Notwithstanding Costco's steady run of strong comp sales growth in recent months, analysts still have relatively modest expectations for the company in fiscal 2018. The average analyst estimate calls for full-year revenue growth of 7.2%. Adjusting for the extra week in Costco's 2017 fiscal year, this translates to revenue growth of about 9%.
A third of the way into fiscal 2018, Costco Wholesale has posted year-to-date net sales growth of 11.9%. While it is true that year-over-year comparisons will become tougher in the second half of the fiscal year, Costco seems well positioned to beat analysts' revenue estimates by 1 to 2 percentage points.
This situation should allow Costco to power past the average analyst EPS estimate of $6.55 this year. (The recently passed tax reform bill will provide a meaningful additional EPS boost.) Costco stock may be pricey, but with one of the deepest moats in the retail business, the discount warehouse giant still looks like a solid bet for long-term investors.
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