Today's results from warehouse giant Costco (NASDAQ:COST) offer a pretty fair view of the company as it stands today -- still strong and growing, but facing competitive challenges against which management will struggle to keep the company in the catbird seat.
But investors, to their credit, are far from giving up on Costco, despite the oft-reported increased worker's compensation costs and competition from Wal-Mart's (NYSE:WMT) Sam's Club. The latter, clearly, is pressuring margins as the world's leading retailer looks to scale its way to price leadership.
Moreover, Costco will struggle to boost profit margins if its chief competitor is slashing prices -- and that's not to mention recent efforts from BJ's Wholesale Club (NYSE:BJ). All these themes are being discussed as investors look for signs of Costco's competitive direction. At least this year, the shares have rolled back upward following its August earnings surprise.
Some indications are positive. While fiscal fourth-quarter and full-year net income fell year over year, same-store sales were up and gross margins held fast. (In its financial filings, Costco counts only net revenue, removing membership fees, thus actually lowering its gross margins.) What's more, net sales grew more quickly than merchandise costs for the third straight year.
In this business, it seems the best defense may be a good offense. With that in mind, Costco continues to expand aggressively. Another 16 or 17 warehouses (including two relocations) are scheduled to open by the end of the year.
New stores will boost the top line, obviously, but also presumably help in the battle for gross profits as the company's scale increases. Costco has generated ample free cash flow through the first three quarters, so further investments should not be a problem for Costco.
Dave Marino-Nachison can be reached at [email protected].
