Why Buying in Bulk Is Still a Growth Story

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Buying in bulk can be a great way to save money. That's what makes Costco Wholesale so great. The company operates a variety of membership "warehouses" across the U.S., with other locations in Puerto Rico, Canada, the U.K., Mexico, Japan, and Australia. The major selling point for Costco shoppers is that it offers products in case, carton, or multi-pack quantities, making it cheaper on a per-unit basis for shoppers.

Costco saw a slight pullback in early December as earnings missed expectations. The company posted earnings per share of $0.96, missing consensus of $1.02. The company cited higher-than-expected selling and general costs. However, digging a bit deeper, things weren't all that bad. Total revenue was up 5.5% year over year, and company-wide same-store sales were up 3%.

COST Chart

Costco data by YCharts

Looking ahead, there are a number of growth opportunities
Costco is still very much a growth story. One important point in favor of Costco's growth in 2014 is the fact that Costco still has a big opportunity to tap and better understand its 70- million-member base. It recently upgraded its membership fee database to SAP, and it could soon look to upgrade its multi-vendor mailer program.

A potential upgrade in its multi-vendor mailer program would allow Costco to analyze and understand years of buying habits. The company has a large member database that it could data mine in an effort to better cater to shoppers.

Another big advantage of Costco is that it has a global footprint. International same-store sales were up 6% during the fiscal first quarter of 2014. Last quarter, Costco opened 13 outlets, and in 2014 the company plans to open another 30 locations. Half of those 30 stores will be in international markets.

Beyond just warehouse growth, Costco is turning to e-commerce. During Q1 2014, Costco saw e-commerce sales up 24% year over year. This comes as Costco launches its site in Mexico.

Wal-Mart  is Costco's biggest competitor, via its Sams Club brand. However, from an investment perspective, Wal-Mart doesn't have the same level of growth as Costco. Wal-Mart is more the value play. The company is focused on its Wal-Mart stores, and Costco currently has 10 more warehouses than Sam's Club. In addition, the majority of Sam's Clubs are located in the U.S.

PriceSmart is another major warehouse company. With a market cap of less than $5 billion, it's easily the smallest of the major warehouse operators. It's also a compelling growth story, being labeled as the "Costco of Latin America."

It has slightly more than 30 warehouses, but it trades at more than 40 times earnings, making it relatively expensive. While PriceSmart's strong expected growth puts its PEG ratio inline with Costco at roughly 2, Costco appears to be the safer bet given its international diversity and strong operating history.

Bottom line
Costco pays a modest 1% dividend yield and trades at 22 times forward earnings. However, its 10-year average price-to-earnings ratio is 24. Analysts have an average price target of $124, with the high target being $143 -- upside of 20%. All in all, Costco looks to be a great pick in the "buy in bulk" space, with a number of growth levers it can pull, including international and e-commerce expansion.

Who's killing Wal-Mart?
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The article Why Buying in Bulk Is Still a Growth Story originally appeared on Fool.com.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and PriceSmart. The Motley Fool owns shares of 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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