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Costco Reports Lower Comps as Gas Prices Plummet (COST)

Posted on | December 4, 2008 Time: 5:45 am |

Warehouse retailer Costco Corporation (COST) reported sales and comparables for November and the past 13 weeks on Thursday morning, as this economy continues to prove that even the best fighters will take body shots.

Costco reported total sales for November down 3% (year-over-year) to $5.55 billion, while sales for the 13 weeks ending November 30th rose 3%, from $16.98 to $17.52 billion.

The November comps told a mixed story, as headline numbers of -2% domestically, -15% internationally, and total company -5% certainly show accelerating weakness from the consumer. But Costco sells a huge amount of gas, and prices have been plummeting the past quarter. For those who feel it’s justified to back out gas sales and the (also) wildly fluctuating FX (count me as one of ‘em), the numbers are much more mild:

U.S. Comps:     1% for month, 4% for quarter-to-date;

International:   6% for month, 5% QTD;

Total:               3% for month, 4% QTD.

I can’t speak to where the rest of retail’s comps will be for November, but I doubt you’ll find anything better, with a possible hat tip to Wal-Mart (they haven’t released yet as I write this). Costco reported similar results in October, while WMT outperformed expectations.

Parting Thoughts

Costco is out there doing what they have always done; tightly manage costs and expenses (margins have been within 100 basis points for many years), and grow modestly, with 4 new locations to open by year’s end. Shares are down about 20% this year, a relative winner in the S&P 500.

The quality of the company’s earnings is the reason why they’ve been afforded some grace by investors, but they will need to stay positive in their comps to retain their above-market earnings multiple. I added more COST shares to the Secular Trends Portfolio on November 3, and they’ve done well to be only down 3% in the past month (the S&P is down about 10%, by comparison).

Gas sales are essentially a loss-leader to drive traffic into the stores…um, no pun intended. Costco’s management, meanwhile cares about just one thing - making its members happy. While I love Wal-Mart right now, both personally and as an investment choice, I don’t put such a premium on their motivations.

Ryan Barnes

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