Shoppers and shareholders alike have reason to love this big-box retailer. The no-frills superstore offers its customers deeply discounted prices and rewards traders with a steadily increasing share price.
The stock is up about 28% in the past year, and may be on the verge of a significant technical breakout. On Thursday, shares hit a new all-time high near $100. And the stock looks poised to soar further, presenting a potentially profitable trading opportunity -- for those who act quickly.
Costco (NASDAQ: COST) operates membership warehouses that offer a wide assortment of products at bargain-basement prices. Helping drive growth is rampant consumer hunger for high-quality, low-cost goods.
By selling out of a bare-bones warehouse space, and purchasing products in enormous bulk quantity, the company can afford to pass huge savings on to customers. Whereas the average big-box retailer takes a 20% to 30% margin, Costco's cut is only about 10%. But what it loses in margin, it makes up for in sales volume. In fiscal year 2011, Costco's average sales volume per store was $146 million, up 5% from a year earlier.
The majority of Costco stores are located in the United States; however, the superstore operates in 80 other countries, making it the ninth largest retailer on the planet. This year, the company plans to expand into Korea and Taiwan, bringing its total store count up to 608.
Technical Outlook: Stock on the Verge of Bullish Breakout
During the past two years, Costco has been in a major uptrend. In May, shares began forming an accelerated uptrend line. The stock has been dynamite ever since. In early June, shares broke through old resistance, which has become new support, near $91.50. In doing so, the stock bullishly completed a small ascending triangle formation.
Continuing to move up, shares hit resistance near $98.22. For much of July and August, the stock was capped at this level. However, during the Aug. 27 trading week, the stock managed to poke its head above resistance, rising to an all-time high of $99.28.
On Thursday, shares hit a new all-time high at $99.99, breaking nearby resistance. In doing so, a second consecutive ascending triangle was completed. This is a highly bullish occurrence. As long as the stock can retain momentum, it could soar much higher.
According to the measuring principle for a triangle -- adding the height of the triangle to the breakout level -- shares could easily reach a new all-time new high of $104.91 ($98.22-$91.53=$6.69; $6.69+$98.22=$104.91). That is 5% above Thursday's close. But with no overhead resistance in sight, the stock could easily soar much higher.
Fundamental Outlook: Strong Revenue and Earnings Growth Potential
The bullish technical outlook is supported by strong fundamentals. Costco reported better-than-expected August same-store sales. This important metric of retail growth came in at 6% (excluding currency conversion and higher gasoline costs). This was well above the 4.5% projected by analysts.
In late May, the company announced upbeat third-quarter results. Due to strong consumer demand, third-quarter revenue increased 8% to $22.3 billion, from $20.6 billion in the comparable year-ago period.
For the upcoming fourth-quarter, scheduled to be reported Oct. 11, analysts project revenue will increase 12.1% to $31.6 billion, from $28.2 billion in the year-ago quarter. For the full 2012 year, analysts expect revenue to ramp up 10.7% to $98.4 billion, from $88.9 billion last year.
The earnings outlook is equally strong. In the most recently reported third quarter, earnings increased 21% to 88 cents, from 73 cents in the comparable year-ago period. Strong sales volumes combined with a 9% increase in membership fees contributed to the gain.
For the upcoming fourth-quarter, analysts' project earnings will rise 20% to $1.30, from $1.08 in the same period a year ago. With nearly 90% of customers renewing their memberships each year, analysts project Costco's full-year 2012 earnings will grow 17% to $3.87, from $3.30 last year.
Risks to Consider
High food and commodity costs, caused by inclement weather this summer may mean Costco will have to raise its prices. This could potentially cause a backlash from angry consumers who are used to paying bottom dollar. However, because Costco's margins are so low compared to its competitors, consumers are unlikely to find cheaper prices elsewhere and will likely stick to shopping at the bustling big-box retailer.