Costco U.S. Clubs to Continue Growth Pace

Costco's growth prospects are largely driven by potential expansion of its highly successful business model into new U.S. markets.
By Trefis ,

NEW YORK ( Trefis ) -- Costco (COST) - Get Report sells merchandise at heavy discounts through its warehouse clubs competing with large retailers like Wal-Mart (WMT) - Get Report, Target (TGT) - Get Report, BJ's Wholesale Club (BJ) - Get Report and Sam's Club.

We estimate that roughly 43% of the $49.76 Trefis price estimate for Costco's stock can be attributed to its U.S. Core Merchandise Division, through which the company offers bulk goods at discounted prices to members that pay an annual fee for access. Costco's growth prospects are largely driven by potential expansion of its highly successful business model into new U.S. markets.

The number of Costco U.S. Warehouse Clubs grew rapidly between 2006 and 2008, from 369 to 403. Over the past few years, however, a difficult economic climate has slowed expansion, with total U.S. Warehouse Clubs now totaling roughly 416.

We believe that there is ample room for continued U.S. expansion given Costco's lower penetration in areas like the North East, and we anticipate an increased growth pace to follow an improving domestic economic outlook. We anticipate a re-acceleration in U.S. Warehouse Club openings in the years ahead and forecast total stores hitting 454 by 2013.

However, aggressive domestic expansion could lead to over-saturation of target consumer markets. Should self-cannibalization hinder profit margins, the company could look to decelerate its U.S. growth pace and place greater emphasis on international expansion. We currently estimate that Costco's International Core Merchandise Division accounts for roughly 19% of the company's value.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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