Don't Let Costco's Short-Term Miss "Fool" You -- This Company Has a Lot of Fight Left

Costco  (NASDAQ: COST  ) missed expectations in its recent first-quarter earnings report, citing lower gasoline prices, weaker foreign currencies, and increased discounting as the primary culprits. Quarterly revenue and earnings per share of $25.02 billion and 96 cents fell short of expectations by $419 million and 6 cents, respectively.

This quarter marked the second straight that Costco posted a single-digit or less EPS increase after a long run of quarters marked by double-digit gains. Coming off last year's less than stellar numbers, pundits paused to evaluate the wholesale retailer's future prospects. I was among them. My conclusion was simple: Although we may need to rethink double-digit growth rates in perpetuity, the company still has a pretty impressive runway for years to come.

In many ways, Costco is a victim of its own success. The company's strong sales over the last five years have been in part fueled by the growing number of wholesale shopping centers popping up in the U.S. and internationally. Maintaining the same growth rate over an increasingly larger base will continually become more difficult. Do not expect store counts to jump above the company's annual target of 30 anytime soon either, as Costco's approach to disciplined growth is well documented. So does the company's maturation spell doom for the investor? Hardly. Growing store count, although important, only tells part of the story. Looking at the chart below, which tracks annual store count growth against revenue growth, we see that revenue has outpaced store count by approximately a factor of 2.28 over the past four years. The astute Fool will realize that this disparity is a result of the company's same-store sales growth.

 

2009

2010

2011

2012

2013

Total Warehouses

527

540

592

608

636

% Units Added

-

2.47%

9.63%

2.70%

4.61%

 

         

Revenue ($billions)

$71.42

$77.95

$88.92

$99.14

$105.16

% Revenue Growth

9.13%

14.07%

11.50%

6.07%

Source: S&P Capital IQ. Author's calculations.

Total Store Count Growth (since End of Year 2009): 20.7%

Total Revenue Growth (since EOY 2009): 47.2%

Revenue to Store Count Growth Multiple: 2.28x

Costco's high-value/fee-paying membership model flips traditional retail patterns on their head, proving time and again to grow same-store sales in steady and consistent fashion. Disciplined store expansion only serves to reinforce this trend by guarding against potential sales cannibalization. Given the company's commitment to its principles and proven track record, I don't expect its ability to grow same-store sales to disappear anytime soon. Even at a relatively modest expansion of 30 additional locations per year, Costco's growth rates may be tempered, but they should be in no way considered average. Let's take a look at the following simple, but telling, projection.

Starting with the company's end of 2013 store count of 636, and assuming flat store count growth of 30 per year, I used a 2.28 revenue to store count growth multiple to calculate revenue growth for the next 10 years. The numbers to the far right show that the outlook for Costco is still pretty impressive.

Year

Store Counts

(Total)

Store Counts (% Increase)

Revenue (% Increase)

2013

636

   

2014

666

4.72%

10.75%

2015

696

4.50%

10.27%

2016

726

4.31%

9.83%

2017

756

4.13%

9.42%

2018

786

3.97%

9.05%

2019

816

3.82%

8.70%

2020

846

3.68%

8.38%

2021

876

3.55%

8.09%

2022

906

3.42%

7.81%

2023

936

3.31%

7.55%

2024

966

3.21%

7.31%

Author's Calculation.

Revenue growth, although falling below double-digits, remains strong. Given these numbers, the company can still continue to deliver on double-digit earnings growth well into the future. Before you go valuing Costco in the context of a traditional retail framework, make sure you draw pause for the right reasons, and understand that this company still has a significant runway for growth.

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