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Costco Wholesale Corp COST

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Mixed Second-Quarter Results at Costco Leave Our Outlook Little Changed; Shares Trade Fairly

Zain Akbari, CFA Equity Analyst

Analyst Note

| Zain Akbari, CFA |

Our $332 per share valuation of wide-moat Costco should not change much after it announced second-quarter earnings. Its sales growth outpaced our target (12.9% adjusted comparable expansion across the company versus our 12.0% mark), but we expected cost leverage on the heightened revenue that did not materialize (25 basis points of operating margin degradation, to 3.0%, rather than our forecast for 25 basis points of improvement). As the double-digit sales growth is attributable to the pandemic and the margin shortfall to freight and fuel pressures we see as transitory, we continue to expect mid-single-digit percentage sales growth and 3%-4% operating margins over the next 10 years. We suggest investors await a greater margin of safety, as Costco faces an uncertain normalization of spending habits once the pandemic ebbs (later this year, we assume).

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Company Profile

Business Description

The leading warehouse club, Costco has 795 stores worldwide (at the end of fiscal 2020), with most sales derived in the United States (73%) and Canada (13%). It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 42% of fiscal 2020 sales, with hardlines 17%, ancillary businesses (such as fuel and pharmacy) nearly 17%, fresh food 14%, and softlines 10%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 6% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).

999 Lake Drive
Issaquah, WA, 98027
T +1 425 313-8100
Sector Consumer Defensive
Industry Discount Stores
Most Recent Earnings Feb 28, 2021
Fiscal Year End Aug 30, 2021
Stock Type Aggressive Growth
Employees 273,000