Costco Has A Long Way To Drop Before It’s Fairly Valued

Costco shopping experience

Costco sells merchandise at heavy discounts through its warehouse clubs competing with large retailers like Wal-Mart, Target, BJ’s Wholesale Club and Sam’s Club.

We estimate that roughly 43% of the $49.76 Trefis price estimate for Costco’s stock can be attributed to its U.S. core merchandise division, through which the company offers bulk goods at discounted prices to members that pay an annual fee for access. Costco’s growth prospects are largely driven by potential expansion of its highly-successful business model into new U.S. markets.

The number of Costco U.S. Warehouse Clubs grew rapidly between 2006 and 2008, from 369 to 403. Over the past few years, however, a difficult economic climate has slowed expansion, with total US Warehouse Clubs now totaling roughly 416.

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We believe that there is ample room for continued U.S. expansion given Costco’s lower penetration in areas like the North East, and we anticipate an increased growth pace to follow an improving domestic economic outlook. We anticipate a re-acceleration in openings in the years ahead and forecast total stores hitting 454 by 2013.

However, aggressive domestic expansion could lead to over-saturation of target consumer markets. Should self-cannibalization hinder profit margins, the company could look to decelerate its U.S. growth pace and place greater emphasis on international expansion. We currently estimate that Costco’s International Core Merchandise Division accounts for roughly 19% of the company’s value.

You can modify the chart above based on your own perspective for Costco’s US expansion and assess the impact on the company’s stock value given flat revenue per square foot and profit margins. Or visit our site to perform more extensive analysis of Costco’s stock value.

See our full analysis for Costco here.

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