Costco’s Growth Is Accelerating

Warehouse club retailer Costco (NASDAQ: COST) posted impressive fiscal third-quarter results late last month, and in the weeks since, the stock has risen to new highs. Its price is now around 13% higher over the past year, significantly outperforming major rivals like Walmart (NYSE: WMT) (up 6%) and Kroger (NYSE: KR) (down 13%).

Investors have good reason to be upbeat. Not only has Costco posted consistently strong comparable-store sales growth, but its comps gains have been accelerating recently. This is happening at a time when Walmart and Kroger have struggled to post meaningful comparable-store sales growth.

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Outperforming its peers

In May, Costco’s revenue increased 14.1% year over year. This was driven primarily by 8% comparable-store sales growth — adjusted to exclude the impact of changes in gasoline prices and foreign exchange rates. As even more evidence of the company’s strong growth trend, Costco was measuring this May’s numbers against a May 2017 in which it had posted a 4.5% year-over-year comps increase.

In addition, Costco’s momentum is accelerating. Comparable-sales growth (when excluding the impact of gasoline prices and foreign exchange rates) for March, April, and May was 5.8%, 7.3%, and 8%, respectively.On a similar note, Costco’s 7% comps growth in its recently reported fiscal Q3 was well above the 5.4% growth Costco delivered in its Q2.

Growth at these levels isn’t the norm for Costco’s peers. Walmart reported comparable-store sales growth of just 2.1% in the U.S. when excluding fuel in its most recently reported quarter. Walmart’s Sam’s Club — a direct Costco competitor — managed growth of 3.8%. Meanwhile, Kroger’s comps increased just 1.5% in its most recent quarter.

And here’s where the difference between Costco and peers Walmart and Kroger’s really shows. Costco’s 7% comparable-store sales growth in its most recent quarter was on top of strong 5% growth in the year-ago quarter. Walmart’s 2.1% growth in the U.S., on the other hand, came on top of weak 1.4% growth in the year-ago quarter. And Kroger’s 1.5% comparable-store sales growth compared to a 0.7% decline in the year-ago quarter.

Of course, Costco’s outsize growth relative to Walmart and Kroger is also evident by looking at total sales. Costco’s trailing-12-month sales are up about 13%. Walmart and Kroger’s trailing-12-month sales are up about 4% and 6%, respectively.

Costco’s strong value proposition

Costco’s ability to consistently drive sales growth is proof of the company’s strength within the changing retail landscape. As e-commerce continues to disrupt the sector, many traditional grocers and wholesale membership clubs have struggled to stand out enough to gain market share. But Costco’s relentless execution at providing high-quality merchandise at lower prices, combined with its massive economies of scale, gives it a value proposition that customers love — as evidenced by its sharp sales growth, and its impressive membership renewal rates of 90% in the U.S. and about 88% globally.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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