Is a Costco Opening in a Neighborhood Near You?

With its high concentration of stores in California, Costco Wholesale (COST 1.01%) is ready to expand to other U.S. states and grow its business internationally. With new stores in Japan and Australia, the company has plans to open about 30 stores during fiscal 2014 in the U.S., Australia, Canada, Mexico, Korea, Japan and Spain.

Costco reported first-quarter results last week. Net sales, minus membership fees, were $24.47 billion, which was up 5%. Membership fees rose 7.4% to $549 million. The wholesaler's first-quarter comp sales at U.S. stores, excluding gas, rose 3%, which was below the consensus forecast of a 4.5% increase. According to Retail Metrics, falling gas prices have had a negative impact on Costco and the company has missed Wall Street's sales expectations in six of the past 11 months. November same-store sales, including fuel and foreign exchange prices, rose 2% and missed the consensus forecast of a 3.5% rise .

In a consumer environment that continues to test retailers, Costco is still a buy due to consistently high traffic and growth in areas like fresh foods and apparel. The company has consistent comp-store sales growth due to its high sales volume of low-priced merchandise. The company's diverse selection of merchandise is a natural hedge against risks that can arise within specific retail markets .

Yet aggressive discounting to maintain market share and attract customers can lead to lower sales and gross margin numbers. This strategy also impacts rivals Wal-Mart(WMT -1.75%) and Target (TGT -0.36%). Market data continues to show that consumers are budget-constrained and are basing many of their buying decisions on promotions, so it will be a tough fight for these retailers to attract customer traffic.

Target shoppers also practiced watchful spending
Target has also been dealing with constrained spending by its customers. For the third quarter ended Nov. 2, sales increased 2% to $16.9 billion versus $16.6 billion reported in the same period last year. Comparable-store sales rose 0.9%, including contributions from new stores. The gross margin rate for the quarter decreased 0.3 percentage-points from last year to 30%. The drop reflects a combination of seasonal markdowns and the company's growth strategies, partially offset by a 0.2 percentage-point gain from modified vendor agreements .

Target had a successful Black Friday as customers responded to deep discounts and other popular offers. On Thanksgiving Day, Target.com's early morning "doorbuster" sales were twice as high as last year's Black Friday sales. Traffic and sales on Thanksgiving Day were the highest for a single day that the retailer has seen .

Wal-Mart's Sam's Club has experienced income growth
While Costco plans additional store openings in the U.S. and abroad, it's about 140 stores shy of matching its rival Sam's Club's presence in the U.S. Sam's Club is Wal-Mart's version of a warehouse club.

Sam's Club has achieved good results for Wal-Mart -- fiscal 2012 net sales of $53.8 billion increased 8.8% over the previous year. Key spending categories for consumers include produce, fresh and frozen foods, and health and wellness. The warehouse club has had strong U.S. comp sales for the past five years, with the exception of 2010 when sales declined 1.4 %.

For fiscal 2013 third quarter, Sam's Club reported growth in operating income of 9.4%, excluding gas. Comp sales, not counting fuel, grew 1.1% to $14.08 billion. For the last two years, the warehouse club had better comp-store sales results for the quarter and year-to-date than Wal-Mart's U.S. stores:

Source: Wal-Mart third-quarter earnings release 

Note: Fuel impact decreased Sam's Club's 2013 13-week results by 1% and its 39-week results by 0.5%.

As Sam's Club focuses on price and offering its customers various ways to save money, the company anticipates fourth-quarter comparable-store sales growth to range between flat and 2%, within the range of last year's 1.8% rise .

My Foolish conclusion
As Costco continues to expand in the U.S. and overseas, it will be able to better compete against low-cost leader Wal-Mart. It's interesting to note that Wal-Mart does not have any Sam's Clubs outside the U.S. (possibly to avoid a situation where it is competing with itself).

There are 600 Sam's Clubs across the U.S., and the company plans to open nine new locations in fiscal 2013 and relocate or remodel six other locations . In comparison, Costco has 646 warehouse stores -- 460 in the U.S. and 186 outside the U.S . More store locations can increase Costco's future sales volumes and attract Wal-Mart's and Target's customers as another money-saving shopping option.