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Costco Succeeds Where Rivals Falter

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Costco (Nasdaq: COST  ) reported a solid quarter yesterday, but some investors balked at shares of the purveyor of bulk merchandise. For anybody more in tune with Costco's true strengths, that seems like a major mistake.

Net income increased 16.4% to $348 million, or $0.79 per share. Revenue jumped 11% to $20.5 billion. Same-store sales increased 7% (or 4% without gasoline sales). International sales were a highlight; foreign comps increased 12% (or 8% without the gasoline impact). Apparently, Costco's not only luring U.S. customer traffic, but tapping into growth abroad as well.

Costco's making a better show of things than discounter Wal-Mart (NYSE: WMT  ) . The retail giant has recently struggled to reinvigorate flagging sales in the U.S., where its comps fell by 1.1% in the latest quarter. Rival Target (NYSE: TGT  ) isn't in such shabby shape, but still, its same-store sales weren't exactly on fire, rising just 2.4% in its most recently reported quarter.

In comparison, warehouse discount rival BJ's Wholesale (NYSE: BJ  ) couldn't boast quite as impressive a quarter as Costco did. Charges may have whittled down its profits, but its same-store sales weren't as robust, either, increasing by 3.8%, or 1.7% without gasoline impact. BJ's recently announced that it may consider putting itself up for sale.

In a demonstration of Mr. Market's fickle ways, Costco's shares dropped in yesterday's trading. That's probably not too surprising, since its shares have been rising consistently lately, sporting a potentially premium price tag. Costco trades at about 24 times earnings, compared to Wal-Mart's price-to-earnings ratio of 12 or Target's P/E of 13.

I bought Costco for my Rising Stars portfolio in December on the strength of its excellent management, which takes employees, customers, and many other stakeholders into account. I consider it a "gold-standard stock," and in my opinion, it deserves a premium price. A company like Costco is so well-run -- and so well-loved by its customers -- that it's simply less risky than its rivals.

The market's temporary bearishness simply gives Fools an opportunity to snag Costco shares at a discount. Investors shopping for a high-quality stock for the long term shouldn't underestimate this great choice.

Costco and Wal-Mart are Motley Fool Inside Value recommendations. Costco is a Motley Fool Stock Advisor selection. Wal-Mart is a Motley Fool Global Gains pick. Motley Fool Options has recommended a diagonal call position on Wal-Mart. The Fool owns shares of Costco, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (11)

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  • Report this Comment On March 04, 2011, at 4:18 AM, FoolDiligence wrote:

    I agree with you that Costco deserves its premium price and yet, the company still trades at a more attractive P/TBV and P/FCF compared to Wal-Mart.

    Also, and this is nothing more than a hunch, but we know Buffett loves Costco and currently holds a small position in the company. With the cash coming to BRK, Costco is the right size (~$31B + premium) that may satisfy that itchy trigger finger Warren has on his elephant gun.

    Either way, I think the company is a great long-term buy.

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