Comparable Sales Wars: Costco, Sam's Club, and Target

Comps don’t tell the whole story, but it’s a tremendously important metric in retail.

Jul 21, 2014 at 5:30PM

"Comps" refers to comparative sales at stores that have been open at least one year. By looking at comps opposed to revenue, we can determine product demand and customer loyalty at a particular retailer accurately.

If we were to only look at revenue when evaluating a company's performance, we could be fooled by new store openings, which aid revenue growth. In other words, a retailer can simply keep opening new locations to show top-line growth. 

In this case, we'll look at comps for Costco Wholesale (NASDAQ:COST) in order to see how it compares to its peers. You're either going to be very impressed or sorely disappointed.

Comps growth everywhere
Costco recently reported June sales, including comps. For the five weeks ended July 6, 2014, U.S. and International comps increased 6% and 8% year over year, respectively. These are excellent numbers.

While the International number is higher, the domestic performance is more impressive given the hesitant consumers in the United States. Costco has managed to buck this trend with its value offerings and strategic locations targeting the middle- to high-end consumer.

The bigger picture
For Costco's third quarter, comps improved 4% year over year. Comparatively, Wal-Mart Stores' (NYSE:WMT) Sam's Club suffered a 0.5% comps decline in its first quarter (excluding fuel.)

Sam's Club doesn't target the middle- to high-end consumer, and it doesn't offer a private brand like Kirklands (20% of Costco's sales) that Costco members have fallen in love with.

Sam's Club's comps number might not appear to be concerning, but both traffic and average ticket declined for the quarter. In order to reverse these trends, Sam's Club is aiming to improve its private brand offerings and to offer more newness. The latter pertains to new (and sometimes unique) merchandise in Fresh (food), Fit (mostly activewear), and Fast (new products hitting the shelves faster.)

Sam's Club has potential to turn itself around, but it's not going to be easy given the fact that its target demographic (low- to middle-income consumer) is struggling due to reduced government benefits and a lack of wage growth. In other words, Costco is outperforming Sam's Club and should continue to do so. What about Target (NYSE:TGT), though?

Relative improvement
Target isn't a warehouse club, but it still aims for the same demographic as Costco: middle- to high-income consumers looking for value.

Target's first-quarter comps declined 0.3%. This isn't a good number. Then again, it depends how you look at it. It's a vast sequential improvement compared to the fourth quarter, when Target's comps declined 2.5% after a major data breach. It was also on the high end of guidance (flat to down 2%.) Since these numbers can lead your mind toward a tug of war, stick with the facts: a comps decline of 0.3% is a negative.

Target's store traffic declined for the quarter, but digital traffic increased. The latter point is much more important than most people realize. You might not see it now, but Target is slowly transforming itself into a digital retailer. It will still have plenty of physical stores, but that isn't Target's future growth channel. If you don't believe me, listen to Target's most recent conference call. Target has three primary goals going forward: 

  • Improve traffic and sales at domestic stores (by improving value, presentation, and newness)
  • Improve Canadian performance (recently changed leadership)
  • Accelerate digital transformation and become an omni-channel leader

That third point should stand out, especially as Target's first-quarter digital sales jumped 30% year over year. However, let's stick to the focus of this article, which is comps.

Target still has many headwinds to face overall. Until it figures out solutions to the first two points on that bullet list above, it's unlikely that Target will deliver any outstanding comps numbers soon. 

The bottom line
Comps doesn't tell the whole story, as you also want to look for margin expansion and net income growth when evaluating a company. It all starts with comps in retail, though. Therefore, that's where you should begin your research as an investor.

Unlike its peers, Costco is delivering strong comps performance domestically. This is in addition to strong comps growth internationally, where there is even more growth potential.

Here's the simple version: Costco is still growing, which is proven by its consistently improving comps numbers wherever it operates. That being the case, you might want to consider it for a long-term investment. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. 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.

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Jun 12, 2015 at 5:01PM

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