Can Costco Continue Its All-Time Record Run?

On Thursday, Costco Wholesale (NASDAQ: COST  ) will release its latest quarterly results. But with the stock having hit successive new record highs since early 2011, will Costco be able to maintain enough growth to justify its somewhat rich valuation?

Costco has been an innovator in the retail industry, with its membership model changing the focus from eking out tiny margins on goods to simply selling for the lowest sustainable price possible and counting on annual membership fees to drive profits. Let's take an early look at what's been happening with Costco over the past quarter and what we're likely to see in its quarterly report.

Stats on Costco

Analyst EPS Estimate

$1.03

Change From Year-Ago EPS

17%

Revenue Estimate

$24.23 billion

Change From Year-Ago Revenue

8.5%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

How will Costco cash in on earnings this quarter?
Analysts have gotten marginally more excited about Costco's earnings in recent months, having boosted their full-year fiscal 2013 calls by $0.04 per share and boosting next year's earnings-per-share projections by $0.03 as well. But the stock has done even better, rising 14% since late February.

Costco has thrived from a business model that was made for success among bargain-crazed shoppers. Through measures like maintaining as little inventory as possible and moving it out the door as quickly as possible, as well as keeping operating expenses low with its no-nonsense warehouse-store look, Costco keeps prices as low as possible and that keeps shoppers coming back for more. In addition, with its membership model, customers pay for the privilege of saving, encouraging them to get their money's worth by making repeat appearances. Members are surprisingly loyal, with global retention rates of between 86% and 87%.

One concern, though, is that after its big share-price run, Costco looks expensive to some investors. With an above-market earnings multiple, some doubt whether the retailer will be able to boost growth substantially enough to justify its valuation. Moreover, Wal-Mart's (NYSE: WMT  ) Sam's Club chain represents a formidable opponent that maintains a loyal customer following of its own, and even after a recent $5 increase in Sam's Club's annual membership fee, it still remains $10 less than Costco after its own price increase in 2011.

Costco's biggest growth opportunity is outside its North American base, where it already has hundreds of warehouse locations. By contrast, less than 10% of its stores are outside the U.S., and it has room to grow its presence in the European and Asia-Pacific region as well. Moreover, PriceSmart (NASDAQ: PSMT  ) has had success in Latin America and the Caribbean with its similar business model, and looking southward could also be a potential growth avenue for Costco going forward.

In Costco's report, watch for signs of the difficulties that rivals Wal-Mart and Target (NYSE: TGT  ) have faced in their own first-quarter results. Target saw particular weakness in apparel sales, and Costco's apparel selection isn't the primary draw for most warehouse shoppers. If Costco can stay strong even as traditional retailers struggle, it could mean even more all-time record highs for the stock going forward.

If you already own or are thinking about buying shares of Costco, there's really just one question you need to ask: With prices at all-time highs, is the ride over for Costco investors? To answer that and more, The Motley Fool's compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.

Click here to add Costco to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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