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Costco's Sales Astound

Discount warehouse company Costco Wholesale (Nasdaq: COST) said comparable- store sales jumped 14% in fiscal Q2, up from a 10% increase a year ago, as revenues across all major lines of business accelerated.

Sales of food and sundries, which account for more than half of revenues, improved 9% from the quarter a year ago, while sales of jewelry, electronics, fresh foods, and ancillary products were robust.

Based in Issaquah, Washington, Costco has 304 warehouses that provide discount prices on about 4,000 products. The membership-based stores won't carry items they can't sell at a deep discount, a feat the company manages by keeping costs low. Warehouses are plain, the stores aren't filled with highly paid sales people, and inventory is tightly managed. The company doesn't advertise in traditional media, but 900,000 customers walk through its doors everyday.

For the quarter, sales increased 17% to $7.6 billion, up from $6.5 billion a year ago. Net income rose 19% to $181.6 million, or $0.39 per diluted share, compared to $152 million, or $0.33 per diluted share, a year ago. The mark was in line with analyst estimates.

Costco shares, up about 50% since September, moved up nearly $4 in early trading in a tough environment for retail stocks. The company's up about 11% for the year while discount retailers as a whole are down about 14.2%, according to the S&P SuperComposite 1500 index. Even discount champion Wal-Mart (NYSE: WMT), which delivered outstanding fiscal fourth quarter results, is down about 27% for the year, punished mainly by fears of higher interest rates.

In addition to solid top line growth, Costco continues its tight management of margins and costs. Gross margins, which hover around 12%, improved six basis points despite a tough pricing environment. Operating margins held firm at 4% as the company reduced sales, general, and administrative costs by 2 basis points.

What's clear as Costco gets bigger and sales accelerate is that it's profitability improves. In the first fiscal quarter, Costco's net cash from operations increased 51% to $240 million, up from $159 million a year ago, yet its asset base increased just 17% over the same time period.

With Costco's run-up since September and Wal-Mart's collapse since January, the two companies trade at trailing PEs of 38.7 and 39.3 respectively, compared to 31 for the S&P 500. Both are priced to perform, but they have solid growth prospects and management's that create value. In a sector that's been unfriendly to retailers, Costco has remained untarnished.

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