Tomahawk, WI 7/25/2013 (Basicsmedia) – Costco cost reductions improve operating margins, memberships increase with high quality customer base, and membership fees induce customers to come back for bulk purchases repeatedly, especially with unique offers on luxurious items from Costco.

Costco Wholesale Corporation (NASDAQ:COST), the warehouse and club chain, reported on May 30 that its third quarter profits climbed around 20%. However, the sales of Costco were less than market expectations. Costco reported that its profits were $459 million for the third quarter or earnings per share (EPS) of $1.04, compared to $386 million or EPS of $0.88 in the same quarter a year ago. Analysts had been expecting an EPS between $1.02 and $1.03.

The revenues also increased 7.9% to reach $24.08 billion but the market expectation of revenues were around $24.21 billion, which the company missed marginally, in spite of a rise of about 8% in revenues. The same-store sales of Costco gained 7% in the United States, excluding fuel prices and the increase was 6% in the U.S. overall. The International growth in same-store sales was 4%.

Costco operates 627 warehouses all over the world and the membership fees of Costco jumped 11.8% to reach $531 million. Costco is having its headquarters in Issaquah in the state of Washington in the United States. The prices of Costco gained 0.75% in pre-market trading on May 30, 2013 but ended the day at $111.81, declining from a high of $115.25. The stock has gained around 14.4% in 2013 and the shares have risen around 32% in the last 12 months.

Opinion of Experts

Market experts attribute the increase in profits and revenues to the still shaky economy of the United States. Shoppers buy in bulk directly at the warehouse clubs of Costco, since the prices of the goods offered at the wholesale warehouse clubs of Costco are less expensive compared to other retail outlets. Buoyed by this boost in profits and revenues, the company announced that it is planning to open up a minimum of nine new warehouses before the end of 2013.

Financial professionals believe that Costco is performing much better in profitability, though the comparable sales growth was between 4% and 5% in the third quarter, mainly because of the changes in the prices of gasoline in spite of adverse movements in foreign exchange transactions due to weak currencies compared to the dollar.

Should You Buy Costco Shares?

There are a few reasons why you should go long on Costco shares. The new signups climbed 19% from the previous year in spite of an increase in membership fee by 5% to 10%. The renewals of existing memberships also remained strong even after the increase in membership fee. The new signups were mostly from Asia, with the opening of two warehouses in Japan. The company is also active in reducing operating costs by lowering the main expenses by 2 basis points, even with a continuous modernization of their IT that increases costs.

The membership system is different from that of Wal-Mart Stores, Inc. (NYSE:WMT) or that of Target Corporation (NYSE:TGT). Costco uses only membership system and you could buy in any of its warehouses at bulk prices, if you are a member. While Costco has gained 1.41%, Target has gained 1.11% but Wal-Mart has lost 0.21%. Even the other competitors like J.C. Penny Company, Inc. (NYSE:JCP) have gained only 0.45%. The main advantage of Costco is that it offers luxurious items at affordable prices from time to time, such as Dom Perignon or Coach Purses exclusively to its members at discounted prices. The marketing and management approach have helped Costco to grow significantly with strong achievements in the recent past despite the feeble economic conditions.

However, the share price of Costco was at $85.49 on June 1, 2012 and it has climbed to a high of $114.83 on May 28, 2013, going above $115 a share in intraday trading on May 30. In spite of its continuing strong performance, it would appear that the shares are likely to fall appreciably in short-term. This is the time to sell shares of Costco and buy them later when the prices fall to levels of around $100 a share.

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