Low Oil Prices Could Be Boon for Costco Stock
It’s no secret that Costco Wholesale Corporation (NASDAQ:COST) has had a rough time in the past several months. Yet despite the COST stock price rebounding from its substantial dip in the summer, some analysts see the company running into more problems in the New Year. I’m not buying it.
The perfect time to take a second look at a stock is when it’s sitting low. If you were to take a gander at Costco, you’d realize that this is one solid company that is performing poorly due to reasons entirely outside of its control. Once those factors evaporate, as they usually do, those who were smart enough to line their portfolio with COST stock could reap huge gains.
Slumping Sales Numbers Hide the Bigger Picture
Costco reported sales numbers for the month of October, announcing net sales having risen by just one percent since the same time in 2014, stagnating at $8.78 billion. But while the American numbers look bad, it’s even worse north of the border. As the U.S. numbers for Costco have risen by one percent, Canadian sales have dropped by -0.8% for the month of October. (Source: “Costco October Net Sales Rise 1% to $8.78 Billion,” The Wall Street Journal, November 4, 2015.) Additionally, global sales numbers outside of North America dropped six percent.
When you take a sober look at the sales numbers, you might be tempted to discard Costco stock. But before you do, consider the following…
These statistics hide a far bigger issue, because once you factor in the positive effects of slumping gas prices, Costco’s comparable sales growth sat at a very healthy five percent, with four percent growth in the U.S., a robust 10% in Canada, and four percent growth internationally, excluding North America. (Source: “Strong US Macros Signal Good Times For Costco, As Store Expansion To Further Boost Growth,” Forbes, November 11, 2015.)
After you’re done filtering through the reports and really figure out that the situation isn’t as bad as sales numbers may suggest, it becomes clear that ongoing low oil prices and the resulting drop in the price of gasoline are going to be a key ingredient in the success of Costco’s financial bottom line.
But let’s rewind the narrative for a second and make a comparison between how Costco performed before the oil price crash. After this comparison, it will become very clear that a decline in the price of gas and a rising U.S. dollar are providing strong uplift to the company’s growth trajectory.
Sales in-store have fallen by one percent in the first three quarters of this year, and total earnings numbers have grown by 2.64%.
Costco started selling gasoline for automobiles in the mid-1990s, as part and parcel of a much wider initiative that aimed to bring in new customers and retain the company’s existing ones. It also served as a means through which to stimulate higher revenue flows.
All in all, this program proved to be a solid success for this wholesale giant, especially as Costco has managed to maintain a very impressive 91% customer retention rate. Would you be surprised to know that this is among the highest rates in the whole U.S. retail industry?
This satisfaction level among its customers translated to very real success in Costco’s bottom line. Costco’s overall in-store traffic volumes rose by a healthy and consistent four percent annually since the 1990s, with consumers continuing to buy Costco’s competitively priced offerings in rising numbers.
Of course, sales volume isn’t everything for a business, as Costco was also able to pull off impressive sales turnover compared to its physical retail space. Costco achieved sales turnover of more than $1,100 per square foot of physical retail space, which is a feat unmatched by the company’s rivals. For example, Sam’s Club and Wal-Mart Stores, Inc. were only able to manage sales turnover of $680.00 and $400.00 per square foot of retail space, respectively. (Source: “Strong US Macros Signal Good Times For Costco, As Store Expansion To Further Boost Growth,” Forbes, November 11, 2015.)
So Costco posted solid growth and was more efficient than the competition? Sounds like a winning formula to me. Not only is the COST stock price performing pretty well despite sales dipping, but Costco is also efficient with its retail space.
It really does all circle back to the low oil prices I mentioned. Despite oil having rallied somewhat from its late-summer low of less than $40.00 per barrel, crude oil is still languishing at a price level around 60% lower than it was 18 months ago. With low oil prices turning into lower gas prices, profits have still increased for gasoline sellers because the margin between crude itself and the refined product has increased.
From a medium- to long-term perspective, many market analysts concede that oil prices are likely to stay in the low- to mid-$40.00s for at least another year, if not significantly longer. The biggest oil bears, however, have stated that oil, and with it gas, will never return to the record-high levels we saw between 2011 and 2014. (Source: “Oil Market Supply Imbalance Getting Worse, Not Better,” OilPrice, November 12, 2015.)
Saying that this is positive news for the Costco stock price would be seriously underplaying the situation.
The Bottom Line: COST Stock Price Forecast
So this is certainly no time to get bearish on Costco. The recent drop in Costco stock’s price is due to factors entirely outside of the company’s control. If energy prices remain low, we could see continued gains in COST stock.