Costco Wholesale Corporation

COST Details

Reported Lower Comparable Sales Growth:Costco Wholesale Corporation (NASDAQ: COST) is a global retailer, which provides a wide selection of merchandise, plus the convenience of specialty departments as well as exclusive member services to its customers.

Q1FY20 Highlights for the period ended 24 November 2019:COST declared its quarterly results, wherein the company reported net sales at $36.24 billion, up 5.6% on y-o-y basis. Net income for Q1FY20 came in at $844 million as compared to $767 million in Q1FY19, which includes tax benefit related to stock-based compensation of $77 million as compared to a $59 million of similar benefit last year.The company currently operates 785 warehouses, including 546 in the US and Puerto Rico. The company reported 100 warehouses in Canada, 39 in Mexico and 29 in the UK. Other than that, the business also operates 26 warehouses in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, and one each in Iceland, France, and China.  The company estimated a negative impact on the sales by approximately one-half percent due to Thanksgiving Day. COST also guided ~12% of lower sales from the e-commerce segment during the quarter. With the inclusion of the impacts from changes in gasoline prices and foreign exchange, COST reported comparable sales growth of 4.3% during Q1FY20, including 4.7% growth from the U.S., 2.9% growth from Canada and 3.2% growth from international markets. The business reported a 5.5% growth in comparable sales from the e-commerce segment during Q1FY20.
 

Q1FY20 Income Statement Highlights (Source: Company Reports)

FY19 Operational Highlights:For the fiscal year ended September 1, 2019, the company reported net sales of USD 149,351 million up 8% on the previous year, driven by a 6% growth in comparable sales and sales at new warehouses opened in 2018 and 2019. During the financial year, Costco Wholesale Corporation opened twenty-five new warehouses as well as increased its selling, general & administrative (SG&A) expenses as a percentage of net sales by 2 basis points.

Valuation Methodology:Price to Earnings Multiple Approach 

Price to Earnings Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation:The stock of COST closed at $297.34 with a market capitalization of ~$131.36 billion. The stock has generated 14.489% and 30.526% return in the last six months and one year, respectively. On YTD basis, the stock has delivered returns of 45.962%. During Q1FY20, the company posted lower comparable sales due to the negative impact of approximately one-half percent on account of Thanksgiving and the company estimated a ~12% sales impact in its E-commerce segment. Considering the aforesaid facts, we have valued the stock using one relative valuation, i.e., Price to Earnings Multiple and arrived at a target price of lower double-digit downside (in % term). Looking at the current trading levels, price movement, valuations and other factors, we are of the view that most of the positives are factored in at the current juncture. Hence, we suggest investors to book profit and recommend a “Sell” rating on the stock at the closing price of USD 297.34, up 0.69% as on 12 December 2019.

 
COST Daily Technical Chart (Source: Thomson Reuters)

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