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March Sales: Strength From Costco and Walgreen, Gap Disappoints

Costco (NASDAQ: COST  ) , Walgreen (NASDAQ: WBA  ) , and Gap (NYSE: GPS  )  last week reported strikingly dissimilar same-store sales results for March. While Costco and Walgreen are clearly performing strongly and leaving the harsh winter behind, Gap seems to be struggling to accelerate growth. Let's take a look at these reports and what they mean for investors.

Costco is solid as a rock
Investors in Costco have been a little concerned lately, as the company delivered lower than expected results for the second quarter of fiscal 2014, and the stock is down by nearly 5.6% year to date.

However, sales data for March looks more than encouraging, and it confirms that Costco is an exceptional player in the discount retail industry. The company posted $10.43 billion in total sales during the five weeks ended April 6, an 8% increase versus $9.67 billion in the same period of 2013.

Source: Costco.

The five-week period this year included 35 days, compared to 34 in 2013. Nonetheless, the company is generating growth rates that are materially higher than those reported by competitors in the mature and stable discount retail industry.

Comparable-store sales excluding the negative impacts from falling gasoline prices and unfavorable exchange rate fluctuations increased by 6% in the U.S. and 9% in international markets, for a total increase of 7% at the company level.

This is nothing short of impressive considering the challenging industry dynamics that have hurt most retailers in recent months. Costco is demonstrating that its unique business model based on membership fees and a loyal customer base can be enormously valuable advantages for generating performance under difficult conditions.

Walgreen continues on the healthy path
With almost 8,700 locations in all 50 states, Walgreen is a leading player in the pharmacy industry, and the company is benefiting from important secular tailwinds including an aging population, broadening health care insurance coverage, and technical advancements in the health care industry.

This is reflected in its financial statements; Walgreen reported better than expected sales for the quarter ended on Feb. 28. Revenue came in at $19.6 billion during the quarter, a 5.1% increase from the same period in the prior year and marginally above analysts' estimate of $19.5 billion. Total comparable-store sales increased by 4.3% during the quarter. 

Source: Walgreen.

Last month's sales numbers confirm that Walgreen is on the right path: The company announced a 4.5% increase in revenue to $6.43 billion, versus $6.16 billion in the same month of 2013. Despite the negative impact of generic drug introductions and a lower incidence of flu this year, comparable-store sales increased by 3.5% year over year.

Mind the Gap
Fashion is a cyclical and fickle business, especially when it comes to companies like Gap that focus on young consumers. But the company is usually considered more stable than the competition because of its big presence in basic fashion apparel for affordable prices.

Through its brands The Gap, Banana Republic, Old Navy, Athleta, Piperlime, and Intermix, the company owns or franchises more than 3,500 stores in 48 countries, and it targets a broad audience, which should provide diversification and stability for Gap in comparison to smaller peers.

Source: Gap.

But Gap is not immune to industry headwinds; the apparel retail sector has been particularly weak lately, and sales figures for February were quite dismal across the board.

Unfortunately for investors, March did not bring much relief. Gap reported a 6% drop in comparable-store sales during the five weeks ended on April 5. Same-store revenue at The Gap global fell by 7% versus the prior year, while Banana Republic delivered a 4% decline in global same-store sales and Old Navy same-store sales fell 7%. 

The company reaffirmed its earnings-per-share guidance for the year, but management warned of accelerating margin declines in the coming quarter, probably because of the intensely promotional competitive environment.

Gap seems to be losing its ability to differentiate itself from the competition lately, and that is a reason for concern and an important risk to watch.

Foolish takeaway
Costco had a great March, dispelling investors' doubts and proving that the company's business model is strong enough to produce sustained results through good and bad times. Walgreen generated solid momentum in recent quarters, and March was no exception. As for Gap, investors need to watch the fashion retailer closely, since a weak performance during March could be a sign of continued difficulties in the coming months.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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