Costco Prospers: Are Consumers Optimistic or Frugal?

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Costco (NASDAQ: COST) issued extraordinarily strong February sales numbers along with its earnings for the period that ended February 12. Revenue for the quarter rose from $20.9 billion last year to $23 billion. But it was the results of the final four weeks of the period that were even more impressive. Because some other large retailers have not done as well recently, it opens debate about whether the consumer is more likely to spend money now, or whether he will spend money only if he believes he sees a “bargain.” Whichever is case, Costco’s results are a sign that consumers are willing to spend money that they were not willing to spend last year.

Costco’s same-store sales for the four weeks that ended February 26 were up 8%. Revenue rose 10% to $7.04 billion. The Costco report comes at a time when economists are wrestling with whether an increase in consumer confidence is likely to be a long-term trend.

Costco stands on its own among large retailers. Its shoppers tend to be more affluent than those who go to Walmart (NYSE: WMT) and Target (NYSE: TGT). But Costco is still big enough to offer signs of how general retail traffic is faring. And those signs suggest that traffic is faring well. Consumers may visit Costco because they want low-priced goods, suggesting that concerns about the economy have not lifted entirely. But if economic worries were severe, Costco’s sales would not have risen at all.

The Federal Reserve announced last week that consumer credit was higher in the fourth quarter. The optimism about that was undercut by recent quarterly results from Sears (NASDAQ: SHLD) and a number of specialty retailers. Because Costco is not a specialty retailer, it is a fairly good measure of retail activity. Its cross-section of products is as wide as any other retailer in the U.S. More people bought something at Costco stores in February than in the same month last year. Whether they were looking for deals is beside the point. Shoppers have become more confident about their financial prospects.

Douglas A. McIntyre

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