Costco Off to Strong Start in New Fiscal Year
The wide-moat retailer has considerable advantages at its disposal, but shares are rich.
After a strong start to fiscal 2019, we anticipate lifting our $191 per share valuation for wide-moat Costco (COST) by a low- to mid-single-digit percentage. Our top-line forecast had been lower than most before the report, likely explaining our more optimistic reaction than the shares' low-single-digit percentage slide in after-hours trading. The news is unlikely to materially alter our long-term targets, calling for mid-single-digit revenue growth and low-single-digit adjusted operating margins over the next decade, nor does it alter our view that investors should await a more attractive entry point before building a position despite the considerable advantages at Costco's disposal.
Costco posted $34.3 billion in revenue (up 10% from the first quarter of fiscal 2018) on 8.8% comparable sales growth (7.5% excluding the impact of changes in fuel prices, foreign exchange, and an accounting method change). The top-line metrics are ahead of our full-year marks (8% top-line on 5% comparable sales growth), though the nearly 30 basis points of operating margin degradation (to 2.7%) lags our flat full-year mark (at 3.2%).
We are encouraged management has been able to work with suppliers to address tariffs, with the need for corresponding price hikes mitigated by Costco's use of its buying power and global sourcing network. With a limited range of stock-keeping units, we believe Costco can continue to take an item-by-item approach, with potential for the chain to boost the value it offers versus non-club peers that are not as well-equipped to work around the cost pressure (though we suspect Costco will also lift prices as needed). We also believe Costco's scale will allow it to work with vendors to tailor item sizes and other attributes to hold absolute prices down. This bargaining power is a vital part of our wide moat rating, as we argue Costco can use its scale (enhanced by its concentrated assortment) to hold procurement costs down in a way that smaller rivals cannot.
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Zain Akbari does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.