Investing in retail stocks at this time may seem like a tricky proposition. Post-recession, retailers have struggled to cope with rising gas prices as consumers have shied away from discretionary spending in the hope of finding cheaper deals.

Considering the tepid economic conditions that we're facing, it could be difficult to find a retailer that is fundamentally solid and has showed exceptional growth. Wholesale discounter Costco (Nasdaq: COST), however, is a darn good bet. In fact, to suggest that the company is firing on all cylinders these days is simply an understatement.

Income matters
Costco's five-year compounded revenue growth rate stands at 8.3%, but in the last 12 months that rate has accelerated to 11.4%. This jump has been aided by the effect of high gas prices and strength in its international operations, especially its Mexico joint venture, which are now consolidated in the company's results.

Revenue from its international operations (including Canada) has grown by an impressive 103%, to $22.1 billion in the last five years. Over the last four quarters, its international ops contributed 26% to its overall revenues. Foreign markets offer very lucrative opportunities, and Costco is looking to capitalize by quickly expanding operations there.

The company, meanwhile, has also improved its profitability, as its return on equity suggests. Its ROE has gone up to 12.6% from 12.2% back in 2006.

Stability
Being strong financially is important for any business, especially when economic conditions are anything but healthy. Costco looks stable when compared to its peers as its debt-equity ratio suggests. Costco's ratio stands at 17.1%, whereas Wal-Mart (NYSE: WMT) sports a higher ratio of 81.4% and Target's (NYSE: TGT) is at 103.6%. Wal-Mart and Target have boosted their businesses aggressively both abroad and in the U.S., taking on debt to do so.

From a financial health perspective, Costco's trailing free cash flow stands at $1.6 billion, up from $615 million in 2006. This figure has been on the rise as Costco has steadily expanded its business. Its current ratio stands at 1.1, which means that Costco is amply capitalized to meet short-term operational needs. Also, its interest coverage ratio stands at 20.8, implying the company is well-positioned to pay off its short-term debt obligations.

Yield and returns
Costco's forward P/E of 25.5 suggests it is valued higher than its peers. Wal-Mart and Target both show P/Es at 11.7. This premium is justified if we consider the strength of Costco's balance sheet and also the growth potential we're looking at with this company, both domestically and abroad.

Costco recently approved a $4 billion stock repurchase program, which is applicable till 2015. This should drive up earnings per share as the company buys in stubs. It also increased its quarterly dividend to $0.24 per share from $0.205.

The Foolish bottom line
Looking at Costco's strong fundamentals and strong balance sheet, it looks like a good investment going forward. Despite the recession and rising gas prices, Costco has performed remarkably well, and I think it will carry this performance forward. Investors should take note.