COST Stock: Rising U.S. Dollar Could Hit Costco Wholesale Corporation

COST StockA Strong U.S. Dollar is a Problem for COST Stock

Costco Wholesale Corporation (NASDAQ:COST) has had a tumultuous last few months. Although the COST stock price recovered from its significant drop back in August, the company could be in big trouble next year.

The wholesale company announced overall sales figures for October, reporting that net sales had grown by only one percent since the same period last year, to $8.78 billion. While Costco’s U.S. sales numbers rose by one percent, sales in Canada slumped by a loss of 0.8% last month. (Source: “Costco October Net Sales Rise 1% to $8.78 Billion,” The Wall Street Journal, November 4, 2015.) International sales outside of North America fell six percent, but these figures obscure a larger picture.

If you exclude the negative consequences of low gasoline prices and currency-related headwinds, the company’s comparable sales growth was at a robust five percent, with four percent in the U.S., a solid 10% in Canada, and four percent growth elsewhere in the world. (Source: “Strong US Macros Signal Good Times For Costco, As Store Expansion To Further Boost Growth,” Forbes, November 11, 2015.)

Once you sift through the announcement and identify what’s what, it emerges that the continued low oil price environment and resulting decrease in gasoline prices has been the main issue for Costco’s bottom line. But let’s walk this back and compare how Costco performed in the year prior to the oil price crash, where it becomes abundantly clear that declining gas prices and a surging greenback are pushing down the company’s growth.

In-store sales have dropped by one percent in the first three quarters of 2015, and overall earnings have grown by only 2.64%. Now, compare this to the 15.48% annual earnings growth for 2014 and you get a much fuller picture of what is limiting the Costco stock price.

Costco Stock Price Forecast: Gas Low, Dollar High

Costco had begun to sell gasoline back in the mid-1990s as part of a broader program aimed at attracting new customers and retaining existing ones, but also as a means by which to increase revenue flows. On the whole, this strategy has proven to be a home run for the wholesale company, given that Costco has maintained an astounding 91% customer retention rate. This is among the highest rates in the entire U.S retail industry.

Customer traffic numbers within the stores have risen by a consistent four percent annually, as consumers continue to purchase Costco’s competitively priced merchandise in ever-growing numbers. But volume isn’t everything, because Costco also manages an impressive sales turnover compared to its retail space. The company manages sales of more than $1,100 per square foot of retail space, which is a figure that remains utterly unrivalled by its competitors. (Source: “Strong US Macros Signal Good Times For Costco, As Store Expansion To Further Boost Growth,” Forbes, November 11, 2015.) Sam’s Club and Wal-Mart Stores, Inc., for example, only manage sales of $680.00 and $400.00 per square foot of retail space, respectively.

So we’ve established that not only is the Costco stock price doing well despite slumping sales, but that company sales are efficient from a retail space perspective. Now, what do low oil prices have to do with Costco’s growth slowing down?

Again, it’s all about low gas prices. Despite crude oil having recovered from its August lows of less than $40.00 per barrel, oil is still sitting at a price approximately 60% lower than it was a year-and-a-half ago. With low oil prices translating to lower gas prices, margins have slipped for gasoline vendors. As for medium- to long-term trends, most analysts agree that gas prices will likely remain low for at least another year, if not substantially longer.

Those at the most bearish end of the spectrum have gone on record saying oil, and gasoline, with it, will never again return to the higher levels seen in the 2011–2014 period. (Source: “Oil Market Supply Imbalance Getting Worse, Not Better,” OilPrice, November 12, 2015.)

To say that this is worrying for the Costco stock price would be an understatement.

Higher U.S. Dollar Could Crimp Margins

As if things weren’t bad enough with news on oil prices, the U.S. dollar is forecasted to remain strong going into 2016. The greenback has soared by approximately 20% against a basket of important global currencies since the beginning of 2015.

There are no signs that this growth in value is slowing down any time soon and this could have strong negative implications for the Costco stock price forecast. Looking at the U.S. economy, it may not show stellar performance, but it is doing quite well when compared to other major economies. Overall unemployment numbers have continued to decline, while average salaries are steadily rising.

It’s at this point you’re likely asking what the relative U.S. dollar value has to do with gas prices being low, which is hitting Costco’s bottom line.

It’s simple, really. A strong U.S. dollar means that foreigners must spend more in order to get the same thing they previously paid less for. Costco has significant international exposure, with about a third of the retailer’s 686 stores located outside of the U.S.

Translation: as the greenback rises, things get more expensive for Costco’s international buyers, which leads to slowing sales.

Consider also that crude oil is purchased in U.S dollars on global markets, which means it is more expensive for foreign buyers. This means that foreign demand will likely decline, which drives down oil prices even further, along with gasoline prices.

The Bottom Line on Costco Stock

With this twofold problem facing the company, Costco really has its work cut out for it if the company wishes to resume its formerly robust growth in 2016. With the U.S. Federal Reserve interest rate hike looking increasingly likely for next month, 2016 could begin with a U.S. dollar surging even higher. This will undoubtedly exacerbate the issues with Costco’s international exposure. It’s for these reasons that I remain bearish on the COST stock price forecast.

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