If there were still any lingering worries about the strength of Costco's (NASDAQ: COST) retailing model, the warehouse giant has now put those concerns to rest.
The hints of a customer traffic rebound that investors saw early last year turned into broad gains in the most recent quarter, and Costco's first sales update of 2017 contained even better news for the business. Comparable-store sales increased 8.8% in December to mark an improvement over the prior quarter's 7.9% hike.
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These latest results show why Costco deserves its premium valuation and remains a good stock to buy today.
Winning the retailing battle
Costco's comps rose 9.1% in the U.S. during December and by 9.6% in its international markets. These growth figures represent improvements over the prior quarter's results and imply a widening performance gap between the warehouse titan and its peers.
Wal-Mart Stores (NYSE: WMT) hasn't issued a holiday sales update yet, but its most recent report predicted comps of 1.5% to 2% for the fiscal fourth quarter. Target (NYSE: TGT) hiked its similar sales outlook in early January thanks to surprisingly strong shopper traffic. But even the new 3.4% comps prediction is less than half the 7% spike that Costco has posted over the last three months.
Costco's digital sales channel is standing up well against these rivals, too, as it jumped 42% last quarter to reach $1.3 billion, or about 4% of the broader business. That gain beat Target's 25% increase but trailed Wal-Mart's most recent 50% spike. Yet Costco's success in the digital realm is impressive considering it has a much smaller physical footprint than either Wal-Mart or Target, and both companies have cited in-store pickup and delivery options as providing key support for their e-commerce growth.
Meanwhile, Costco's membership metrics indicate the retailer is having no problem maintaining customer loyalty. Subscriber traffic sped up to a 5.9% rate last quarter from 4% and the company added just added over 1 million members to its base as its renewal rate held steady at 90%.
Yes, that's a tad below the 91% record Costco set in fiscal 2015. But it's still a healthy figure given the disruptive co-branded credit card switchover and the company's first annual membership fee hike in almost six years.
The membership wins are delivering earnings growth that investors just aren't finding elsewhere in the retailing world. Costco's operating income improved 12% in the last fiscal year and jumped 17% in the most recent quarter. Wal-Mart, Kroger, and Target have all reported declines on this key metric recently.
Worth the price
Investors are being asked to pay up for that stronger operating and financial performance. Costco's price-to-earnings ratio is 30, which isn't cheap based on the stock's past valuation -- or when stacked against competitors. Wal-Mart's P/E is 27 and both Kroger and Target shares are valued at less than 20 times earnings. Costco stock leads these peers on price-to-sales basis, too.
Shares are worth the premium, in my view, thanks to the powerful combination they deliver of market-beating sales growth and steadily increasing profits. There are cheaper choices in the industry, and ones that income investors might find more attractive given Costco's irregular dividend policy. But the warehouse giant is still the clear retailing leader when it comes to growth prospects and financial strength.
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