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solzberg in Gainers & Losers,

Costco's stock to hit $180 mark in medium term

I remain upbeat about the shares of Costco Wholesale, a US-based operator of wholesale membership warehouses. Recently, the company reported flat same-store sales for the month of June (the five weeks ended July 3), better than the 1.5% decline projected by analysts. However, excluding the adverse impact of foreign currency fluctuations and deflation in gasoline prices, Costco’s comps for the month under review rose 3%. The company recorded comparable sales growth of 2%, 7% and 2% across its US, Canadian and Other International outlets, respectively. Total sales increased 3% to $11.33 bn last month.

Costco’s financials for its fiscal 2016 third quarter ended May 8 were solid. Sales went up 2.5% driven by comparable-store sales improvement (excluding the effects of lower gasoline prices and currency headwinds) of 3%, while membership fees increased 5.8%. Operating margin expanded 10 basis points to 3.2%, and earnings per share rose 6% to $1.24 beating analysts’ average projection by 2 cents. The company paid a quarterly dividend of 45 cents per share, which offers annualized dividend yield of 1.1%.

Costco currently operates 705 warehouses, including 493 in the US and Puerto Rico, 90 in Canada, 36 in Mexico, 27 in the UK, 25 in Japan, 12 in Korea, 12 in Taiwan, eight in Australia and two in Spain.

So, Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of the merchandise it offers. Its strategy to sell products at highly discounted prices has helped in sustaining growth amid soft economic conditions. Also, the company’s diversification strategy acts as a natural hedge against risks that may arise in specific markets.

I expect Costco’s shares to continue to rise, with medium-term target at $180.