Costco, Missing Shoppers, Can't Get a 'Buy'

As the recession prompts shoppers to abandon traditional department stores and pricey boutiques in favor of wholesale clubs and discount retailers, a major player still finds its stock one notch short of a "buy" from TheStreet.com Ratings.

Costco ( COST) gets an overall grade of C-plus from TheStreet.com Ratings model. Wal-Mart ( WMT), BJ's Wholesale Club ( BJ) and PriceSmart ( PSMT), meanwhile, are recommended as "buys" with overall grades in the "B" range.

TheStreet.com Ratings model determined Costco's "hold" status by quantitatively weighing the firm's valuation metrics, current financial situation and analysts' consensus expectations of future growth. The firm's "risk grade" of a cautious D-plus pulled its overall grade into the "C" range, which equates with a "hold" recommendation.

Costco won't be able to lure as many miserly consumers as other companies. Financial analysts expect Costco's net earnings per share to fall 8% this fiscal year, which ends in August, before resuming growth in 2010, with an advance of 11.7%. The dip in profitability results in a price-to-earnings ratio for Costco of close of 16, based on the current year's estimated net. The firm's shares, therefore, appear to be less appealing than its competitors, whose P/E ratios are in the 12-13 range.

The discounter's stock rose steadily from the high $20s in 2002 and peaked in the mid-$70s in July 2008. From there, it spiraled downward to its current range in the low $40s.

Yesterday, Costco announced that same-store sales slipped 3% in February from a year earlier. Because of a strong recovery in the value of the greenback relative to foreign currencies, the dollar value of Costco's international same-store sales tumbled 15%. Without the negative impact of lower gasoline prices and foreign-exchange adjustments, same-store sales would have climbed 5%, with an advance of 6% in international locations.

In addition to an Internet sales operation, Costco currently operates 553 warehouse stores, including 406 in the U.S. and Puerto Rico, 76 in Canada, 21 in the U.K., six in Korea, five in Taiwan, eight in Japan and 31 in Mexico. It plans to open an additional 10 to 11 new warehouse stores before the end of fiscal 2009.

Costco's net sales for the second quarter of fiscal 2009 declined 1% to $16.49 billion from $16.62 billion a year earlier. Net income was $239.7 million, or 55 cents per diluted share, compared with $327.9 million, or 74 cents.

COSTCO IS CLOSE TO A 'BUY'
Company
COSTCO WHOLESALE
Ticker
COST
Industry
Food & Staples Retailing
TheStreet.com Ratings Reward Grade
B
TheStreet.com Ratings Risk Grade
D+
TheStreet.com Ratings Overall Grade
C+
TheStreet.com Ratings Recommendation
Hold
Recent price
42.34
Market Cap ($Mil.)
18,343.6
Total Assets ($Mil.)
20,682.3
Total Debt ($Mil.)
2,346.4
Latest Fisc. Yr. Revenue ($Mil.)
72,483.0
Cash Flow from Operations ($Mil.)
2,176.2
Earnings Before Interest & Taxes ($Mil.)
1,984.7
3-Yr. EPS Ann'l Growth Rate (%)
31.7
EPS - Latest Fiscal Year
2.89
EPS - Curr. Year Consensus
2.66
EPS - Next Yr. Consensus
2.97
Price/Book Ratio
2.1x
Ret'n on Equity (%)
14.5
P/E - Current Year
15.9x
P/E - Next Year
14.3x
Dividend Yield (%)
1.51
Source: TheStreet.com Ratings (Data as of 2/27/2009)
For an explanation of our ratings, click here.

Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.

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