In today's market, the retail space is fraught with risk. High energy prices have crimped consumers' disposable income, and the housing slump has dented household formation -- a backbone of retail sales growth. Meanwhile, sluggish job growth is sending a signal that a U.S. economic slowdown is underway. Hence, if one is to consider a retail play, it should be a well-capitalized company, with a demonstrated business model, and Costco (NASDAQ: COST) fits that bill.
Costco helped define the 'get it for wholesale' space and now operates 520 warehouses, primarily in the United States and Canada. (The company operates 30 stores in Mexico via a joint venture.)
Costco's philosophy differs from its competitors in that it focuses on a limited selection of national-brand merchandise and some private-label products. That laser focus, combined with buying direct from manufacturers and the company's bare-bones warehouses, enables the company to operate profitably despite smaller gross margins. The Reuters F2008/F2009 EPS consensus estimates for COST are are $2.98/$3.39.
Analysts like COST's strong balance sheet, sector leadership, consistent earnings and dividend growth, as well as its membership fee stability. An accelerated new store expansion plan adds to the mix.
The risks? Costco is, obviously, vulnerable to a U.S. economic slowdown. Analysts are also concerned about intensifying competition, as not only national chains but also region/local outlets begin to match some of Costco's prices.
The First Call mean rating for COST is: Hold [25 firms]. Mean 2008 target: $69.25 [high: $80, low: $50].
Stock Analysis: Costco is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from COST's shares. Don't buy Costco's shares if your portfolio already contains an adequate retail stock component. Suitable Sell / Stop Loss for COST: $47.
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