U.S. Stores Generate Most Value for Costco

Although U.S. retail giant Costco (NASDAQ:COST) has launched an aggressive international expansion campaign in recent years, its U.S. business remains significantly more valuable  than its overseas operations.

Costco is the second-largest U.S. retailer after Wal-Mart (NYSE:WMT) and the largest retailer in the warehouse club category, posting revenues of about $70 billion in calendar year 2009. It competes mainly with Wal-Mart’s Sam’s Club division and with BJ’s Wholesale Club (NYSE:BJ). Like other warehouse clubs, Costco extracts membership fees from its customers in exchange for heavy discounts on a wide variety of merchandise.

Costco’s U.S. core merchandise business (excluding ancillary segments like fuel, pharmacy, food etc), is more than twice as valuable as its international core merchandise business, constituting roughly 43% of our $50 price estimate for Costco’s stock . Our analysis follows below.

U.S. market valuable but nearing saturation

Costco operated about 410 U.S. stores at the end of 2009, nearly three times more than its 140 international stores.[1] This ratio is likely to decline in future as Costco opens more stores in international markets, where most of the chain’s expansion opportunities now lie. In the U.S., Costco is a well-established brand with very broad penetration across the country. Although Costco still continues to grow domestically, we believe that its U.S. penetration is already high and will soon reach saturation levels.

You can drag the trend-line in the chart below to create your own U.S. stores forecast for Costco and see how it impacts the company’s estimated share value.

Bigger U.S. stores add more value

Costco’s  revenue per square foot for U.S. stores was about $814 in 2008, versus $810 for international stores.[2] International revenue per square foot figure declined in 2009 because Costco opened several stores later in the year, which limited their revenue contribution. We think this decline was temporary. Going forward we expect the international and U.S. divisions to remain roughly comparable from a revenue per  square foot perspective.

However, Costco’s U.S. stores are generally bigger than its international outlets.  U.S. stores have an average square footage of nearly 143,000, versus 137,000 square feet for international stores.[3]

At similar levels of revenue per square foot, bigger stores yield more sales and add more value, which largely explains why Costco’s U.S. division is currently worth more than its international business.

You can see the complete $50 Trefis price estimate for Costco’s stock here.

Notes:
[1] Estimated from store count given in SEC filings for calendar year end (different from Costco’s fiscal year end)
[2] Estimated from revenues and square footage given in SEC filings for calendar year end (different from Costco’s fiscal year end)
[3] Estimated from store count and square footage given in SEC filings for calendar year (different from Costco’s fiscal year end)