Membership warehouse giant Costco (Nasdaq:COST) continued to impress investors by posting double-digit sales growth during its second quarter. Higher commodity costs tempered the earnings expansion, but the company overall continues to fire on all cylinders. However, at the current earnings valuation, an even bigger archrival looks like the better investment.
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Second Quarter Recap
Net sales grew 10% to $22.5 billion. Comparable store sale growth was balanced across the U.S. and international markets, with both advancing a very healthy 8%. Backing out the effects of higher gasoline prices and positive foreign currency movements on comps, growth was still strong at 7 and 10%, respectively. The rest of the upside came from opening two new stores in Japan. Management cited particular recent strength in the hardware and automotive product categories, with the strongest regional trends in the Midwest and Texas. An increase in membership fees took effect in November, but Costco recognizes the increase on a deferred basis, or over the annual period that the membership lasts for.

SEE: The 4 R's Of Investing In Retail

Operating income grew to $1.2 billion, growing 5.9% to lag the top line increase. Higher product costs lowered gross margins, and management did its best to offset the increase through SG&A costs that rose at a slower rate than sales. Higher interest income pushed net income growth back to 8.2%, as the bottom line advanced to just below $714 million, or $1.62 per diluted share.

For the full year, analysts currently project that sales growth will come in at 10% to match the second quarter growth. This would result in total sales of almost $98 billion. Analysts expect earnings of $3.85 per share, or solid annual growth of close to 17%.

The Bottom Line
Costco's sales and profits have accelerated as of late, and this has pushed the stock towards its all-time highs. The share price appreciation has even outpaced the operational gains and the forward P/E has risen to 22.4. This is now close to double Wal-Mart (NYSE:WMT), which has a forward earnings multiple of 12.1. Costco's near-term business momentum is much stronger than Wal-Mart, which also owns membership warehouse archrival Sam's Club. But over the past decade, Wal-Mart has grown its earnings at a faster annual clip of just over 12%. Costco is just below 10%.

The reality is that both firms are very large and will be hard-pressed to grow their bottom lines consistently in the double digits. They have much more visibility and consistency than big-box rivals such as Best Buy (NYSE:BBY), Sears (Nasdaq:SHLD) or JC Penney (NYSE:JCP), with Wal-Mart the better deal at the current valuation. Like Costco, its international growth prospects are much more appealing than its domestic ones. (For related reading, see 2011 Retail Roundup.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Tickers in this Article: WMT, COST, SHLD, JCP, BBY

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