The many countries Costco operates in. Source: Costco.com.
Costco International (COST 0.77%) reported its October 2015 sales figures on Nov. 5. During the month, companywide comparable-store sales decreased 1% year over year, following flat comps in September and falling comps in August. Domestically, Costco is doing OK, as U.S. same-store sales rose during the period, up 1% year over year regardless of falling fuel prices. The big issue for Costco is falling comps at Costco's international locations, where comparable-store sales dropped a whopping 8% in Canada during the month and 6% for all of its other international locations combined.
Costco's international locations are dragging it down, but here's why you shouldn't let that worry you. Over the long term, Costco's international expansion is still going to help drive this company's overall growth.
Costco's bright spot: The United States
Costco has been performing nicely in the U.S., and there are many indicators that this performance will only get better over the coming quarters. Even though lowered gas prices have hurt U.S. sales, the company has still managed to continue growing sales through higher traffic and online sales growth. If fuel prices, which are out of Costco's control, are adjusted for, U.S. comps would have been 4% in October year over year.
As the U.S. economy continues to advance, Costco's domestic sales should continue growing as well. Unemployment hit just 5% in October, a five-year low, meaning that we're likely to see higher consumer spending as families' confidence in the market continues to rise. Retail sales have already started to rise, up 2.4% in September year over year, compared with around 1% in April.
Are international sales really that bad?
The reason Costco's international comps look so bad is that the strengthening U.S. dollar makes sales made outside of the U.S. look much lower when that revenue is transferred into U.S. currency. Costco has about a third of its locations outside the U.S., so the dollar's run over the past year is having a major impact on all of those operations.
Data source: Costco October sales results press release.
Even though currency fluctuations make Costco's international comps look pretty grim, accounting for these fluctuations Costco's international comps during October would have been 10% year over year in Canada and 4% in all other markets. That would put companywide comps up 5% for the month and 7% for the past nine weeks, year over year.
Why this matters
While Costco's comparable-store sales growth looks great when you take out the effect of currency fluctuations, the reality is that those currency issues are there and Costco's actual comps are still falling. However, seeing what these comps would look like with neutral currency shows us that Costco is clearly operating very well at its international locations, regardless of what current sales look like in U.S. dollars, and that its global expansion plan is working.
Costco's international locations are also more profitable, making up 27% of total revenue but 36% of total operating income. A lower cost of doing business helped Costco to report a 4.2% operating margin at its international locations during fiscal 2015, compared with 2.7% in the United States.
So while Costco's international locations are dragging down comps now, when currency rates even out or even tip the other way, Costco will be able to report great total sales growth from both its well-performing U.S. operations and international growth.
