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Costco Looks to Maintain Leadership with New Warehouse Clubs

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Costco’s revenue growth trends

Costco Wholesale (COST) has grown its top line at a CAGR (compounded annual growth rate) (IVW) (IWF) of 8.4% over the past five fiscal years. The CAGRs for Costco’s peers are as follows:

  • 1.8% for Target (TGT)
  • 2.7% for Wal-Mart Stores (WMT)
  • 7.2% for Kroger (KR)
  • 25.6% for Amazon.com (AMZN)
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Wall Street analyst consensus for Costco’s revenue

However, Costco’s revenue is projected to rise by a relatively lower 4.3% to $28.6 billion in fiscal 2Q16, according to consensus analyst estimates. As discussed in the preceding part of this series, energy price deflation and the stronger US dollar are likely to hold down comparable warehouse sales.

New warehouse clubs

Most of Costco’s sales growth in fiscal 2Q16 is likely to come from new warehouse club openings. With 487 warehouses clubs in the US at the end of fiscal 1Q16, Costco is the largest membership warehouse club in terms of sales. The retailer reported US sales of $84.4 billion in fiscal 2015. Costco expects to open 30 new warehouse clubs, both in the US and outside the US, in fiscal 2016, which ends in August. In fiscal 1Q16, 11 net new warehouses were opened, including seven in the US.

By contrast, Wal-Mart’s (WMT) Sam’s Club, which had 655 locations as of January 31, 2016, is slated to open between seven and ten new Clubs in fiscal 2017. Sam’s Club’s sales came in at $56.8 billion in fiscal 2016.

Club productivity and profitability, membership loyalty

Due to the wholesale model employed by the retailer, Costco’s sales per square foot is considerably higher than that of its competitors. However, Costco appears to be selling higher volumes in less space and less time. Also, due to the high degree of cost control exhibited by the retailer, Costco’s profitability per square foot has consistently exceeded competitors.

Opening new clubs in the US may, however, cannibalize sales from existing warehouses to an extent. Due to this factor, it’s important for Costco to attract new members and retain existing members. We’ll discuss this in the next part.

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