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3 Hot Retailers Defying the Cold Weather

By Andrés Cardenal – Feb 9, 2014 at 8:30PM

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Costco, Walgreen, and L Brands are delivering strong performance in a tough retail environment, and that says a lot about the fundamental quality of these companies.

A harshly cold weather and an intensely promotional retail environment are generating heavy headwinds for companies in the retail industry. On the other hand, companies such as Costco (COST -0.67%), Walgreen (WBA -0.65%), and L Brands (BBWI -3.29%) are reporting surprisingly strong sales figures in a tough environment, and that´s important information to consider when looking for the best companies in the sector.

Source: Costco.

Costco withstands all weather conditions
Costco has a rock-solid business model that's built to thrive even under the most challenging scenarios. The company sells all kinds of necessities, and it does so at competitively low prices. As opposed to margins on sales, Costco makes most of its money from membership fees, so the company can sell its products at razor-thin profit margins, or even at a loss, to keep its customers happy and loyal.

Costco announced some really strong sales figures for January. Comparable sales, excluding the impact of foreign exchange fluctuations and falling gas prices, increased by 6% during the month. Sales in the U.S increased by 5%, while international markets performed even better, with a big increase of 8% in comparable sales, excluding fuel price and foreign currency volatility.

Costco is clearly gaining market share versus competitors such as Wal-Mart (WMT -0.76%) and its Sam´s Club warehouse clubs. Wal-Mart announced on Jan. 31 that earnings for the fourth quarter of fiscal 2014 will likely be at the low end of, or slightly below, the company's previously issued guidance because of weaker than forecasted sales.

Wal-Mart´s guidance for the quarter is already quite uninspiring: The company expects flat comparable-store sales in Wal-Mart U.S., and a growth rate of between 0% and 2% at Sam's Club comparable-store sales, excluding fuel.

Costco is not only doing quite well in spite of industry headwinds, but it's also outgrowing a leading competitor like Wal-Mart by a considerable margin.

Source: Walgreen.

Healthy performance from Walgreen
Walgreen reported a 3.7% increase in January sales to $6.39 billion versus $6.17 billion in the same month of 2013. Total comparable-store sales increased by a solid 2.9% during the period. The company opened 139 new stores over the year ended in January 2014, 12 of them in the last month, for a total of 8,678 stores.

Front-end sales grew by 2.4%, and comparable front-end sales increased by 1.6% annually. Pharmacy sales increased by 4.6%, while comparable-store pharmacy sales grew by 4.1% when adjusted by calendar shifts.

While customer traffic in comparable stores fell by 2.2%, basket size increased by 3.8% in January. Lower traffic is not precisely the the kind of news investors like to receive; however, weather conditions are are most likely responsible for that to a considerable degree.

Besides, the fact that consumers continue buying more products and spending more money at Walgreen in spite of visiting the stores less frequently speaks well about the company's resiliency and ability to perform under difficult conditions. Walgreen operates in a defensive industry, and growing health-care demand over the years bodes well for the company in the long term.

Source L Brands.

Victoria's profitable secret
L Brands announced better-than-expected sales figures for January, and the company also provided encouraging earnings guidance as management now expects fourth-quarter earnings per share to be "slightly above" its previous estimate of $1.60 per share.

This is quite rare in the current retail environment, and it's a materially positive sign, as it may indicate that margins are holding up better than anticipated.

L Brands had to cut its earnings-per-share guidance in January, when it announced weaker-than-expected sales for the key December period. This positive update comes from a reduced guidance level; however, the company seems to finding signs of early stabilization and improving conditions, so things could easily continue getting better in the coming months.

The company reported a big increase of 9% in comparable-store sales during January, and Victoria's Secret was the main growth contributor for L Brands during the month, with a 10% in comparable-store revenues. While Bath & Body Works and La Senza performed quite well, with increases of 6% and 4%, respectively, the popularity of Victoria´s Secret brand is an invaluable asset and source of competitive differentiation for the company.

Bottom line
A rising tide lifts all boats, and even mediocre companies can do well when conditions are favorable for growth. It takes a high-quality business to grow in a challenging scenario, though. Costco, Walgreen, and L Brands are proving their ability to deliver solid performance in spite of industry headwinds, and that's a clear sign of fundamental strength and management savviness for these companies.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Costco Wholesale. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Walmart Stock Quote
$152.05 (-0.76%) $-1.17
Walgreens Boots Alliance Stock Quote
Walgreens Boots Alliance
$41.21 (-0.65%) $0.27
Costco Wholesale Stock Quote
Costco Wholesale
$491.22 (-0.67%) $-3.31
Bath & Body Works, Inc. Stock Quote
Bath & Body Works, Inc.
$42.41 (-3.29%) $-1.45

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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