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Investment idea - Costco Wholesale

Costco Wholesale (COST), an international chain of membership warehouses, recently released a strong operating report for September 2015. Net sales rose 2% y-o-y to USD 10.75 bn. LFL sales (taking into account devaluation effects and excluding negative impact of falling auto fuel prices) were up 8% y-o-y. Sales in Canada were a growth locomotive (+10% y-o-y). Financial results of 4Q15, ended on August 30, were rather strong. Net profit increased 0.7% y-o-y to USD 34.99 bn, while revenues from membership fees climbed 2.2% to USD 785 nm. LFL sales decreased 1% in the reporting quarter amid falling auto fuel prices and a strengthening US dollar. At the same time, excluding the impact of these negative factors, LFL sales rose 6% (6% in the US, 7% in Canada and 6% in other countries). Operating profit was up 6% y-o-y to USD 1.16 bn, while operating margin climbed 0.1 pp to 3.6%. EPS jumped 9.5% y-o-y to USD 1.73, outpacing consensus of Wall Street analysts of USD 1.66.

Currently, Costco operates 686 warehouses: 480 in the US and Puerto Rico, 89 in Canada, 36 in Mexico, 27 in the UK, 23 in Japan, 12 in South Korea, 11 in Taiwan, 7 in Australia and one in Spain. Despite the negative impact of low gasoline prices and a strong dollar, the company sees opportunities for further expansion both in the US and abroad, and intends to fully benefit from these opportunities. Costco plans to open 32 new warehouses over the next 12 months, 13 of which will be built outside the US. In addition, the company is gradually rolling out online sales in the UK, the UK and Mexico. Onlinesalesrose 20% inFY15.

We are upbeat about the future prospects of Costco. We believe that the company’s strategy involving sale of a large volume of products at discounted prices will be effective amid the current difficult economic conditions and allow Costco to further demonstrate relatively low but stable growth of financial performance.

We raised our target price for Costco shares to USD 163 and reiterate a Buy recommendation in the mid-term. The short-term technical target is USD 160.