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Costco's Consistently Strong Sales Growth Continued in January

By Adam Levine-Weinberg – Updated Apr 14, 2019 at 4:01PM

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Investors weren't impressed with Costco's sales performance last month, but they should have been.

Shares of Costco Wholesale (COST -1.40%) slipped last week after the company's January sales results didn't quite live up to investors' lofty expectations.

Still, most brick-and-mortar retailers would be thrilled to put up numbers like Costco did in January. The warehouse-club giant is posting strong sales results month after month. It could continue to do so for the foreseeable future by leaning on its economies of scale and rock-bottom cost structure to undercut rivals' pricing across a whole host of merchandise categories.

Another excellent month

During the retail month of January -- the four-week period ending on Feb. 3 -- Costco's sales jumped 8% to $10.71 billion. Comparable-store sales rose 5.2% despite a substantial headwind from the strong dollar and falling fuel prices.

Excluding those factors, as well as a change in revenue recognition, Costco posted a 7.4% comp sales gain last month, consisting of 7.3% growth in the U.S., a 4.6% increase in Canada, and an 11.2% surge in other international markets. The strong growth outside the U.S. and Canada was driven by the earlier timing of the Lunar New Year in 2019 compared to 2018, which boosted sales in markets such as Taiwan and Korea.

The entrance to a Costco warehouse

Image source: Costco Wholesale.

Costco estimated that the timing of the Lunar New Year boosted comp sales by about 0.5 percentage points globally in January. However, that factor was fully offset by severe winter weather that depressed sales in much of the eastern U.S. last month.

Breaking down the numbers

Costco's 7.4% adjusted comp sales increase for January was right in line with the 7.3% gain it posted in the first four months of its 2019 fiscal year. It was slightly better than the 6.8% comp sales increase that Costco reported for its full fiscal 2018.

Furthermore, rising customer traffic remained the main driver of Costco's sales growth, which bodes well for the sustainability of its recent positive trends.

In another promising sign, Costco posted strong sales growth across all of its major merchandise categories last month. Comp sales rose at a high-single-digit rate for fresh food, hardlines, and softlines, and at a mid-single-digit rate for food and sundries.

Check out the latest earnings call transcript for Costco.

Appliances are just the beginning

Costco's consistently strong sales growth can be traced in large part to its ability to undercut competitors on pricing. With annual sales of nearly $150 billion from a very small selection of items, Costco has massive bargaining power relative to suppliers. This allows it to keep costs down and attract customers with unbeatable prices.

Over the past few years, Costco has used this formula to become a major player in the appliance business. After neglecting the category for years, it became the No. 9 appliance retailer in the U.S. in 2017, growing appliance sales 28% year over year to $347 million. The final tally for 2018 isn't in yet, but it's a safe bet that Costco continued to post strong gains -- helped out by Sears Holdings' woes.

Over time, Costco should be able to apply the same tactics to gain market share in plenty of other areas. For example, it has been putting more emphasis on furniture in the past year or so.

Costco stock certainly isn't cheap: It trades for about 27 times the company's projected 2019 earnings per share. However, that's a very reasonable premium considering that Costco has what it takes to grow sales and earnings at a steady rate for many years to come.

Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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