How Costco Outperformed Walmart and Target on Comps



Recent performance

Costco (COST) has posted impressive sales performance over the past several quarters and has outperformed both Walmart (WMT) and Target (TGT). During the recently concluded quarter, Costco’s comps (comparable store sales) in the US grew 7.7% (excluding the changes in fuel prices and currency movements). This is higher than Walmart’s 2.1% growth (excluding fuel) and Target’s 3.0% increase.

All three retailers have improved traffic, with Target recording 3.7% growth—its highest in the past ten years, which is still lower than Costco’s 5.1% increase. Costco’s net sales have grown at a double-digit rate in the past four consecutive quarters, reflecting industry-leading comps.

Factors driving Costco’s comps

As Amazon (AMZN) has expanded in the grocery business, both Walmart and Target have ramped up their e-commerce offerings, which have contributed to their comps growth. Shopping convenience is one of the key catalysts that drive traffic, and Walmart and Target have performed well in this regard.

However, Costco kept it fairly simple and didn’t directly take on Amazon. Instead, it focused on its essential ingredient—value. During the company’s fiscal third-quarter[1. fiscal third quarter ended May 13] conference call on May 31, Richard A. Galanti, Costco’s CFO, stated that the company continues its investment in price to widen the value gap with its competitors. In our view, while convenience is important to consumers, the value proposition is the significant growth driver.

Costco isn’t sitting idle, as it partnered with Instacart to offer home delivery of groceries. In our view, this move is a good start, and the company has some room to grow on the digital front to match its peers.

In addition to offering value pricing, Costco’s strong membership renewal rate and square-footage expansion have supported its sales growth rate.

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