Costco Posted Another Strong Quarter

Warehouse club giant Costco reported another strong quarter last week, with sales up 8% and earnings up 19% year over year. Costco continues to see strong traffic growth as customers appreciate its industry-leading prices. This has driven increases in the company's membership base, and has also allowed Costco to gradually increase membership fees.

Meanwhile, the company's plans to open an average of 30 new warehouses each year for the next five years remain on track. Costco has plenty of room for international growth, since more than 90% of its warehouses are located in North America today. Costco seems poised to seize the opportunities it has in Asia and Europe, where it faces less competition than in North America.

Earnings recap
For the 12 weeks ending on May 12, Costco achieved a solid 5% increase in comparable-store sales. Excluding the effects of currency and gasoline price changes, that figure would have been 7%. Membership income, which accounts for nearly 75% of Costco's pre-tax earnings, grew 12% to $531 million, due to increases in the membership base and the lingering effects of a membership price hike from late 2011.

One of the best things for shareholders about Costco's business is its stability. From quarter to quarter and year to year, Costco tends to exhibit steady improvement in sales and earnings, driven by membership increases and stable or slightly expanding margins. For example, last quarter, merchandise gross margin widened slightly, from 10.6% to 10.7%, while SG&A declined slightly as a percentage of merchandise sales: from 9.85% to 9.82%.

Although these margin changes are almost imperceptible, they helped increase non-membership income by more than 30%: from $154 million to $201 million. Since Costco has annual sales of $100 billion, even small margin improvements -- combined with steady sales growth -- can have a noticeable impact on profitability.

Opportunity abounds
One of the biggest reasons to like Costco is that the company is getting ready to expand more aggressively in international markets. Today, 85% of Costco's warehouses are in the U.S. and Canada. Costco operates fewer than 100 warehouses outside of those two core markets, most of which are in Mexico and the U.K., with smaller numbers in Japan, South Korea, Taiwan, and Australia.

Yet Costco's international operations tend to be more profitable than its U.S. business. In part, that is because Costco has only pursued the highest-value opportunities internationally. However, another major factor is that there are very few competitors in the warehouse-club business outside of North America. By contrast, Costco competes heavily with Wal-Mart's Sam's Club warehouses and privately owned BJ's Wholesale Club in North America.

Accordingly, of the 150 warehouses Costco plans to open in the next five years, less than half will be in the U.S. (the company's best estimate is 55, according to the conference call). The company plans to ramp up its expansion in Mexico, where it only has 33 warehouses today but Sam's Club has more than 100. Costco will also increase its presence in its Asian markets, where the discount warehouse concept is relatively new but rapidly growing in popularity.

Get on board
Costco may seem a little pricey, as it trades for 23.6 times expected fiscal year 2014 earnings. However, for that price you get a company that has a big moat -- i.e., price leadership -- very consistent growth, and an opportunity to grow its margins by expanding in international markets where it faces little or no direct competition. Costco's international expansion should drive solid earnings growth for years to come, making this a good stock for long-term investors to consider.

Costco's low prices haven't just benefited customers -- shareholders have walloped the market, returning 11,000% over the past two decades. However, with prices near all-time highs, is the ride over for Costco investors? To answer that and more, The Motley Fool's compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.

The article Costco Posted Another Strong Quarter originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. 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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