19 Jan

Why New Warehouses Are a Must-Have for Costco

WRITTEN BY Phalguni Soni

Fiscal 2016 outlook

Costco Wholesale (COST) doesn’t provide guidance numbers for earnings and revenue unlike its peers Walmart (WMT) and Target (TGT). Based on consensus Wall Street analyst estimates, the company is expected to clock revenue of $122.1 billion in fiscal 2016, ending August 31, 2016. That’s a growth rate of 5.1% year-over-year. Adjusted earnings per share (or EPS) is expected to come in at $5.51, implying a growth rate of 5.1% over fiscal 2015.

Why New Warehouses Are a Must-Have for Costco

Costco’s outlook and earnings drivers

Growth in earnings and sales is likely to be primarily driven by new warehouse openings. Costco plans to open 32 this fiscal year including 22 in the US. US store (XLP) (SPY) openings may result in sales cannibalization, resulting in slower comparable warehouse sales growth going forward. However, the investments in new warehouses may be necessary given the high geographic concentration and the high growth in same-store sales that the company has already experienced over the past several quarters. Costco plans to spend $2.8 billion to $3.0 billion on capex this year, and about $2.5 billion to $3.0 billion through fiscal 2020.

The negative impact of forex movements and gasoline price deflation, which severely affected fiscal 2015 and 1Q16 results, will likely affect Costco’s financials in the current year as well. On the other hand, these factors may be somewhat mitigated by same-store sales growth, both at home and abroad. Lower gasoline prices will likely provide upside to consumer spending, particularly in the US, where employment generation has been robust.

Profitability upside

Costco’s future margins are likely to benefit from its international expansion plans. As detailed in part 11, Canada and other overseas countries have historically been more profitable for the company. Plus, labor costs also tend to be relatively lower in some countries compared to the US.

Costco’s profitability is also likely to get a bump from the increasing penetration of its private-label brand, Kirkland Signature, and focus on organics. These factors should also prove accretive to margins going forward.

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