Why Costco and PriceSmart Should Be on Your Watchlist


According to First Research, warehouse club and superstores are expected grow at a good pace in the next two years , which is why the likes of Costco and PriceSmart could be good investments.

With revenue in excess of $100 billion, Costco is the leading wholesale club operator in the U.S. and the fourth-largest retailer in the world . PriceSmart is also known as Latin America's Costco, and has been growing at a good pace of late. The performance of both Costco and PriceSmart has also bested retail behemoth Wal-Mart , along with the Dow Jones U.S. Broadline Retail Index (DJUSRB) as shown below.

COST Chart
COST Chart

COST data by YCharts

Consumer spending drives 70% of the U.S. economy. Hence, investors wait eagerly for the quarterly report card of companies like Costco as it also reflects the health of the economy and the direction in which it is moving. Last month, Costco reported its fourth -quarter results. The performance was satisfactory, but it missed estimates on both top and bottom lines.

A look at Costco's performance and growth
Costco's comparable-store sales, or comps, witnessed an increase of 5% in the quarter from the year-ago period. Total revenue from membership and net sales inched up 0.8% to $32.48 billion as compared to 7.9% growth in the same quarter in the previous year. Earnings came in at $1.40 per share versus $1.39 in the same quarter a year ago.

Costco has managed to grow despite a weak economic environment as a result of offering a wide range of merchandise at heavily discounted prices, which is what cash-strapped consumers are looking for as they aim to stretch their dollars.

Costco's growth story is primarily based on getting new memberships and also being able to retain members. New members increased by 9% year-over-year in the previous quarter and membership renewals continued their strength in the 90%-plus range.

As part of its expansion, Costco plans to open 18 new stores in fiscal 2014 in the international markets. Also, Costco has an advantage over a retailer such as Wal-Mart as it carries fewer items, as a result of which it needs fewer staff and hence, offers them far better wages as compared to Wal-Mart.

A Bloomberg report depicts how Wal-Mart has been in a soup due to lack of proper merchandising and disorganization. Shoppers are failing to find what they need at Wal-Mart stores, which, in turn, is a boon for peers such as Costco. Wal-Mart recently lowered its full year profit forecast and sales have fallen for three quarters straight. Its same-store sales in its recently reported quarter fell 0.3% in the U.S.

Wal-Mart's Sam's Club, which is a direct rival of Costco since it operates on an identical membership model, is also struggling. Comparable store sales at Sam's Club increased 1.1% in the previous quarter while analysts were looking for growth of 1.3%. Going forward, Wal-Mart expects Sam's Club same-store sales to range between flat and 2%. So, Costco has been doing better than Wal-Mart as far as comps growth is concerned and this outperformance could continue as it expands internationally.

PriceSmart: Latin America's Costco
PriceSmart also operates on the same business model as Costco, albeit on a smaller scale. Year to date it has appreciated the most, outperforming its peers by a huge margin. Being a "profit by membership" driven business, PriceSmart increased membership fees about a year ago.

As a result of this, income from membership fees grew 24% in the fourth-quarter compared to the year-ago period. Although renewal rates dropped to 85%, but that is still considered a very good number if we consider that membership revenue saw a growth of 24% versus the same period a year ago .

The growth story of PriceSmart is also based on membership revenue. In February this year, it announced a property acquisition in Costa Rica for opening its sixth new warehouse. This is a good move as in the previous quarter; PriceSmart's Latin America segment had sales growth of 17.1%, which included the addition of the two Cali Columbia locations. Its sales increased 13.9% versus the same quarter a year ago and comparable warehouse sales growth for the quarter was 9.3%.

PriceSmart's growth projection is more optimistic. Earnings are expected to grow at a CAGR of 17.5% over the next five years and this is quite possible as the Latin American economy grows and PriceSmart expands. Hence, investors looking for a warehouse retailer growing aggressively should consider PriceSmart for their portfolio.

Thus, we see that the two warehouse retailers have been doing well. PriceSmart is plying its trade in a high-growth market and should get better due to expansion moves.

On the other hand, Costco is also doing pretty well and has been expanding its footprint internationally. Analysts expect Costco's earnings to grow at a CAGR of 12.38% in the next five years. Its recent revenue miss could very well be a one-time miss and Costco should do better once its strategies start working.

A few more companies that should be in your watchlist
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The article Why Costco and PriceSmart Should Be on Your Watchlist originally appeared on Fool.com.

Fool contributor Sharda Sharma 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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