Costco's Magnificent Recovery

The results of Costco Wholesale (NASDAQ: COST) for the September quarter were impressive, even if they are already priced into the retailer’s shares. Net sales for the fiscal 2010 fourth quarter, the 16 weeks ended August 29, 2010, were $23.59 billion, an increase of 8%.

Comparable store sales rose 6% worldwide and 4% in the US for the period that ended last month. International results on a same store basis were up 14%.

Costco is a reasonable proxy for the retail industry in the US, or at least the big box part of it. Sales for Walmart (NYSE: WMT), Target (NYSE: TGT), Sears Holdings (NASDAQ: SHLD), and the other store chains that operate in hundreds of locations and will need to offer discounts to holiday shoppers were also probably strong in the third quarter.

Costco may have benefited from an increase in traffic from shoppers who expect to get low prices, because the chain does appeal to bargain hunters. But, this holiday season will probably cause most large retailers to give steep discounts to keep inventory moving. The retail industry understands that unemployment and flagging consumer confidence will make customers particularly careful about purchases if they make them at all.

Costco’s results are slightly different from many others because the chain targets the higher end consumer. Costco parking lots are filled with Mercedes, BMWs, and other luxury cars. There is hardly a 20-year old pick-up in the lot.  All shoppers may not be on their way back to strip malls and shopping centers, at least in great force, but the well-to-do seem to have come out of hibernation.

Douglas A. McIntyre