Costco's November Sales Fall Short, Investors Remain Steadfast

Costco (COST) reported disappointing same store sales totals for November, but investors remain confident about the wholesale retailer's business model, and the stock is rising Thursday despite the sales shortfall.

The retailer reported same store sales of 1%, missing the estimates of 1.3% growth. The November total continued the trend of tepid sales improvements - October results came in up 2% - as the results continue to be buffeted by the strong U.S. dollar, the volatility in fuel prices, and deflation in food prices.

Costco reported fiscal 2017 net sales increased 3%, to $27.47 billion, a figure that was also a little light of some forecasts. Analysts were expecting $28.3 billion in sales, according to published accounts. Costco's fiscal year runs from September through August. Its fiscal 2017 first quarter ended Nov. 20. 

Nevertheless, the stock has advanced $2.60, or 1.7%, to 152.67 in Thursday's intraday trading. Costco stock has been a bit of a disappointment in 2016, easing 6% year to date, reflecting investor concern about the headwinds the company faces from foreign exchange and fuel prices, as well as the relatively rich multiple at which the stock trades.

Costco's price to earnings ratio is reaching 28 times its forward earnings projections, roughly double the 14 times that Target (TGT) commands.

Nevertheless, investors have remained upbeat about Costco's exposure to fees from members. The company charges a $55 annual membership fee to its customers. While revenues from fees represents just 4% of company revenues, it accounts for 75% of profits. The fee generation from membership has been both impressive and predictable, as Costco's loyal membership base renews at a rate of more than 90% a year.

There has been some chatter that Costco management may be thinking of increasing the membership cost, something it hasn't done in five years. By contrast, rival Sam's Club, an operation of Walmart Stores (WMT) , offers memberships that start at $45 a year.

Costco is slated to report its fiscal 2017 first-quarter results next week, on Dec. 7. Estimates call for the retailer to post $1.19 in EPS, a 9% improvement over the comparable period last year. Analysts will be looking closely at what the retailer will have to say about traffic growth, as that metric has slipped in recent quarters over the prior period.

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