Membership warehouse and big-box retailer Costco (Nasdaq:COST) disappointed investors with weak profit growth during its fiscal third quarter. The company is still on track to match the historical growth it has posted for more than a decade, but this growth is insufficient to justify the current share price valuation. As a result, a couple of big-box retailers currently have more appealing investment appeal.
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Third-Quarter Recap
Total sales increased 16% to $20.6 billion as retail sales jumped 16% to $20.2 billion and membership fees improved 10.1% to $435 million. Reported sales increased as Costco now consolidates its 50% Mexican joint venture, as well as on new store openings and a double-digit jump in comparable store sales. Specifically, total comps jumped 12% and consisted of a 10% growth at the domestic store base and impressive 18% increase at international locations. Excluding gas sales, comps increased a more modest but still respectable 7%, and they remained in the double digits internationally. (For more, see Going International.)

Higher commodity costs pushed merchandise costs up 16.6%, but management was able to hold SG&A expenses in check as they lagged sales growth by increasing only 11.3%. The net result was a 13.2% increase in operating income to $556 million. Backing out income related to the interest it doesn't own in Mexico, net income rose a more modest 5.9% to $324 million. Share buybacks pushed up per-share growth as earnings grew 7.4% to 73 cents per diluted share. This came in below analyst projections. (Find out what these company programs achieve and what it means to stockholders. For more, see A Breakdown Of Stock Buybacks.)

Outlook
For the full year, analysts currently project sales growth just below 12% and total sales of nearly $87 billion. The consensus analyst projection is $3.36 per share, for year-over-year growth of around 13%.

Bottom Line
Costco's near-term margins are getting squeezed by higher commodity costs, but the long-term outlook continues to support high single-digit sales and profit growth, as Costco has been able to achieve on average every year over the past decade. International will result in most of the growth and should allow the company to outgrow more domestic-minded rivals including BJ's Wholesale Club (NYSE:BJ) on the east coast and PriceSmart Inc. (Nasdaq:PSMT) on the west coast.

At a forward P/E of nearly 21, the investment appeal of Costco is limited. Retail giant Wal-Mart (NYSE:WMT) looks more appealing at a forward P/E of just over 11, and WMT has the ability to grow profits in the low double-digits and is looking at increased international expansion. It also sports a higher dividend yield of 2.6%, as compared to Costco's current yield of 1.2%. Office store giant Staples (Nasdaq:SPLS) also looks interesting at a forward P/E of 10.5, as it saw its shares plummeted after a tough first quarter. (For more, see Evaluating Grocery Store Stocks.)

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