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Costco Wholesale Corporation Continues to Dominate Sam's Club

By Adam Levine-Weinberg - Feb 28, 2016 at 12:20PM

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Costco has seen a slowdown in sales growth lately, but things are a lot worse at Sam's Club.

Discount warehouse chain Costco Wholesale (COST 2.00%) has long distinguished itself from other retailers through its consistently strong comp sales growth. However, in the past few months, its comp sales growth in the U.S. (excluding fuel price changes) has started to slip.

Even with this recent sales slowdown, Costco continues to post far stronger results than its top rival, Wal-Mart's (WMT 0.01%) Sam's Club warehouse chain. Sam's Club has been coping with comp sales growth of less than 1% in recent years. Moreover, Wal-Mart reported earlier this month that comp sales actually declined at the warehouse chain during Q4.

Costco's sales growth decelerates
As recently as November, Costco was posting high domestic comparable sales growth. During that month, Costco reported a 6% comp sales gain in the U.S., excluding the impact of gasoline price deflation. The company stated that sales growth was particularly strong over Thanksgiving weekend for key gifting categories like consumer electronics.

Costco was posting great comp sales growth as recently as November. Image source: The Motley Fool.

Domestic comp sales growth (again excluding fuel) decelerated to 4% in December. Most troubling of all, domestic comp sales rose just 1% in January. Management attributed some of this weak performance to severe winter weather and a shift in the timing of the Super Bowl.

Sam's Club wipes out
While Costco's sales trend over the past few months hasn't exactly been inspiring, it looks a lot better when compared with Sam's Club's dreadful results.

During Q4, total sales at Sam's Club in the U.S. declined 0.1% year over year, excluding fuel. Comp sales fell 0.5% (again excluding the impact of fuel) during the quarter, missing Wal-Mart's guidance for 0% to 1% comp sales growth. This was down from Sam's Club's modest 0.7% comp sales increase excluding fuel during the first three quarters of fiscal 2016.

The weak sales results at Sam's Club were driven in large part by food price deflation. This led to comp sales declines in the critical fresh foods and grocery categories during Q4. Management also pointed to a 30 basis point negative impact from severe winter storms near the end of the quarter, confirming a headwind that Costco had cited on its January sales call.

Sam's Club's weak sales trends got worse in Q4. Image: Wikimedia Commons user Dwight Burdette.

A few months ago, Wal-Mart unveiled some initiatives to boost sales growth at Sam's Club. A key aspect of Sam's Club's turnaround strategy is a plan to tap into higher-income consumers with improved merchandise offerings, thereby driving increases in revenue per member. Sam's Club is also investing heavily in e-commerce sales growth.

Sam's Club CEO Rosalind Brewer stated on Wal-Mart's recent earnings call that the company started to execute on its turnaround initiatives in Q4. However, it is still at the beginning of what could be a multiyear process. As a result, Wal-Mart doesn't expect any quick improvements. The company is projecting flat comp sales at Sam's Club for Q1.

Costco continues to win
The poor sales performance at Sam's Club last quarter indicates that Costco's recent sales softness was driven by slower growth for the whole warehouse club segment rather than lower market share. In the long run, Costco should be fine, as its low cost structure and immense buying power give it big advantages over traditional retailers.

In theory, Sam's Club should have the same advantages. However, as a relatively small piece of Wal-Mart -- if that can be said for a $57 billion business -- it doesn't benefit from the same degree of management focus as Costco. As a result, Sam's Club is likely to continue underperforming Costco in the discount warehouse market.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$128.88 (0.01%) $0.01
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$546.52 (2.00%) $10.71

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