Below is a brief explanation of why we are adding Costoco (COST) to the long side of Investing Ideas today:
HEDGEYE OPINION FROM ANALYST HOWARD PENNEY
Robust sales figures should prove that this is a retailer in a class of its own, yet many prefer to point to an uncertain future.
Given COST’s limited SKU count of roughly 3,800 items per warehouse and strong volumes, they have the ability to negotiate for the best possible price with producers, and they pass most of those savings onto the consumer, creating a value equation that can’t be beat.
Despite a competitive price environment, COST was able to achieve a relatively flat gross margin YoY at 10.98%, down just 2bps YoY. Equally as impressive was the 22bps improvement in SG&A as a percent of sales, despite investments in ecommerce, as a result of strong sales performance. Before getting into the quarter we also want to highlight the improvement in renewal trends, which ticked up 10bps sequentially to 90.1% in the U.S. and Canada and 87.3% worldwide, up from 90.0% and 87.2%, respectively at 2Q end.
It is clear to us that COST has plenty of levers to pull to improve the business, and there is a seat reserved for them in the future of food retail.