Costco Surging Internationally, Keeping Ahead of the Pack in the U.S.

Costco (NASDAQ:COST) traditionally competes with warehouse club operators including BJ’s Wholesale Club (NYSE:BJ) and Sam’s Club, in addition to large retailers like Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY) and Target (NYSE:TGT). The retailer operates a warehouse club model wherein it charges annual membership fees to customers and, in turn, offers deep discounts on selected merchandise.

The company recently released its earnings and based on continued strength in international sales and controlled capital expenditures, we have updated our price estimate to $64.67. This price estimate stands roughly 10% below market price.

International Sales Strength

Costco continued its international expansion in 2010. However, rather than opening a lot more stores internationally, the company improved its international sales. For the 26-week period from September to February, Costco’s international warehouse clubs experienced a comparable store sales growth of about 14% compared to 5% for the U.S. ^[1] Some of this was influenced by rising gasoline prices as well as foreign currency impact. Excluding this effect, the comparable store sales growth figure for Costco’s international business was 9% vs. 4% for the U.S. during the same period. ^[1]

See our full analysis and $64.67 price estimate for Costco

Given these results, our charts for Costco’s international stores and international revenue per square foot might seem counter-intuitive. While we mention that Costco has not expanded much internationally in terms of new stores, our charts show a jump. This is the result of a change in accounting techniques concerning Costco Mexico. Previously, the retailer had used equity accounting for its Mexico business, but beginning fiscal year 2011, it started consolidating these stores. Thus, we have incorporated this into our forecasts, causing a spike in the reported number of international stores in 2010.

The inclusion of Costco Mexico stores also affects our revenue per square foot forecasts. Specifically, this reporting change has prompted a dip in 2010 numbers. This is also counter-intuitive given Costco’s strong international growth. But since the revenue contribution from these stores was limited to less than half of the year, it weighed down the international revenue per square foot figure.

Excluding Costco Mexico’s incorporation in our model, this figure would have increased by roughly 10%. As we proceed into 2011, this figure should rise significantly due to full contribution from Costco Mexico going forward.

See our full analysis and $64.67 price estimate for Costco

Costco Doing Better than Competitors

Costco has not only been performing well internationally, it has also recorded stronger growth than its direct competitors like Sam’s Club and BJ’s Wholesale Club in the U.S. Excluding the effect of gasoline, BJ’s Wholesale Club’s comparable store sales growth was about 1.7% in the recent quarter. ^[2] Sam’s Club recorded 2.7% growth. ^[3] But both of these figures stand behind Costco’s comparable store sales growth of 3%. ^[1]

1. Costco’s SEC filings [↩] [↩] [↩]
2. BJ’s Wholesale Club 4Q earnings fall on expense, Yahoo News, March 2 2011 [↩]
3. Wal-Mart’s SEC filings [↩]