Source: Costco.
Among big-box retailers, Costco Wholesale (COST -0.24%) stands out for its innovative way of producing strong sales and profits. Rather than trying to squeeze every penny of available margin solely from the pricing of its goods, Costco has learned how to entice customers to buy annual memberships just to gain access to its stores, and it then offers even lower prices than its competitors in order to keep those customers coming back for more. The strategy has worked well over the long run, but in just the past month, Costco has drawn the attention of optimistic investors, sending its stock up 13% since mid-October. Let's take a closer look at Costco to see why shareholders have gotten so enthusiastic about the stock and what's next for the retailer going forward.
What's lifting Costco stock higher?
At least some of the gains that Costco has posted recently came because of the relatively strong results the retailer posted in its fiscal fourth-quarter earnings report earlier in October. Costco saw revenue climb by an impressive 9% for the quarter, with same-store sales growth of 6% leaving big-box competitors Wal-Mart (WMT 0.46%) and Target (TGT 1.03%) in the dust by comparison. Net-income gains of 13% were even more impressive, as growth in high-margin membership fee revenue played a valuable role in producing greater profits.
Yet perhaps the more important news for Costco's long-term growth came from the international side of its business. About a month ago, Costco said that it would enter the Chinese retail market for the first time. But instead of committing huge amounts of capital toward building out a store network -- a mistake that has disappointed retailers as strong as Home Depot (HD 0.74%) in the past -- Costco intends to make its foray into China through the third-party Tmall e-commerce platform. Even though this means Chinese shoppers won't get the visceral impact of Costco's store format, the move will allow Costco to tailor its offerings to give customers the best possible experience, setting the stage for gradual but steady growth as Chinese shoppers become more familiar with the company.
Closer to home, Costco has also addressed some of its larger challenges. Demographically, the company's customers skew toward the older end of the spectrum, but Costco has targeted younger shoppers through a social-media offering that has the potential to pay off with big long-term benefits even if customer loyalty rates don't prove to be as high as with its existing membership base. With Costco reporting solid results from the campaign, investors hope that it will be able to hasten its growth and broaden its audience to accelerate gains in revenue and profits going forward.
Source: Costco.
Costco: Getting back to normal
As impressive as it sounds in a single month, a 13% rise isn't all that much for Costco investors from a longer-term perspective. Over the past five years, Costco shares have more than doubled, as shoppers have seen their financial fortunes recover from the 2008 recession.
But what's especially good news for Costco is that investors have broken out of their recent funk. Earlier this year, Costco's sales growth slowed, and nervous investors worried that the deceleration represented an inevitable long-term deterioration in Costco's ability to keep extending its reach over the retail sector. Recent results have dispelled that notion, though, and the huge potential from Costco's largely untapped international markets could produce the next wave higher for the company.
The next step for Costco
Costco investors are enthusiastic about the company's future not just because of its most recent results, but because the retailer's long-term strategy is well-aligned with global economic trends and the path of least resistance toward growth. By embracing further investments in its domestic warehouse locations while simultaneously building new stores abroad and establishing a global online-retail presence, Costco is pushing hard to take full advantage of every opportunity it has -- and in the long run, shareholders should be the ones to benefit the most.
