Costco Drives Sales With Gasoline

 | Mar 03, 2015 | 10:00 AM EST
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Costco (COST) reports on Thursday. Wall Street is extremely excited about the quarter since the company has been artificially holding down the price of gasoline in order to drive store traffic

Some investors were surprised when Costco announced a 7% same-store sales figure for January. Most were expecting a more typical 4% or 5% comp. But when you look deeper, same-store sales were driven by strong store traffic. Traffic was up 5.8% in January versus an average of around 4%.

In January, customers were flocking to Costco more than usual. Many analysts concluded that management is discounting gasoline below the competition to drive store traffic and repeat visits. It seems to be working. Average transactions rose 1.5% as customers stopped in to buy a few things while they were there to fill the gas tank. The company operates 459 gas stations.

Analysts expect $27.68 billion in revenue for the second quarter and $1.18 in earnings. For fiscal 2015, analysts are estimating revenue growth of 6.5% to $119.98 billion, up from $112.6 billion last year. If the company were to achieve that growth, earnings would increase 12% to $5.20.

The company expects to open between 25 and 30 new stores, not including a few relocations. About half of the new stores will be opened overseas. As of the first quarter, Costco had 671 warehouse clubs, with 474 in the U.S. and 88 in Canada. The company had 77.5 million cardholders and a 91% renewal rate.

I think the announcement that American Express cards will no longer be welcome at Costco after March 31, 2016, is a slight negative, but it can be overcome. Management just announced that Visa and Citigroup will be the new credit card partners.

Investors love Costco. In the last five years the stock is up about 142% and it shows no sign of slowing down. As long as the company continues to execute, the stock should continue to work its way higher.

I worry that food inflation, foreign exchange rates and higher gasoline prices could slow same-store sales. The first quarter same-store sales were so much better than usual I would be concerned the company couldn't keep up the pace and would disappoint in the future. If gasoline prices move higher (like they have been in California) or competitors lower their prices a few cents, gas margins could get squeezed and store traffic might slow.

I think the stock could reach $150 as long as management can continue to execute at the first quarter level.

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