Costco Sees Limited Selling During Market Plummet
Posted on | September 16, 2008 Time: 1:58 pm |
Yesterday’s carnage left few sectors undamaged, and even fewer stocks had what could be called a respectable day. Costco Wholesale (COST), however, recovered into positive territory twice yesterday before finally succumbing to the late-day selloff to finish down fractionally. The members-only wholesaler has proven to be a safe haven during the summer, even managing to make up nearly all the 11% plus drop seen on July 23 when the company issued its first profit warning in years.
As far as warnings go, Costco’s was about as admirable and strategic as they come. As one can imagine, food costs are rising fast at the wholesale level, putting extreme pressure on retailers to pass these increases along in order to maintain margins. Costco said quite bluntly that they intended to hold prices steady on many products in order to “drive sales and maintain the confidence of our members”.
In other words, they chose to stick it to competitors like Sam’s Club and BJ’s Wholesale (BJ) and maintain their most valuable asset - happy customers to spread the gospel to non-members - in the face of rising gas costs and a downright brutal environment for the U.S. consumer in general.
Since the profit warning, Costco reported 9% comps growth in August, well ahead of the broad headline retail figures and allowing them to keep double-digit comps rolling for the entire 3rd quarter. They’ve added $1 billion to their existing stock buyback program, bringing the total to $5.8b, of which $1.2b remains.
Pick Your Poison in Consumer Sector
Investors looking to maintain some exposure to consumer stocks in their portfolios have slim pickings if they want to sleep well at night. Wal-Mart (WMT) has continued to surpass expectations, and the ultra-cheap retailers like 99 Cent Stores (NDN) will trade well simply based on the prevailing thinking that when broke, buy weird crap for a dollar that you’d never consider buying any other time.
Costco actually stands tall in this environment. They’ve got an employee-friendly management, and the beautiful kicker of $1.5 billion plus in annual membership revenues that drops like a rock to the bottom line. Shares trade for an above industry-average 24x trailing earnings, but the balance sheet is pristine and operating cash flow should come in above $2 billion for the full year. Also, because the company essentially uses gas sales as loss leader to drive traffic, the recent pullpack of pump prices should incrementally improve margins beyond what the company expected back in July.
Ryan Barnes
Disclosure: Author does not hold positions in the stocks mentioned.
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