BMO Capital Remains Positive on Costco Wholesale (COST) After Meeting with Management

July 13, 2015 7:49 AM EDT
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BMO Capital reiterates an Outperform rating and $165.00 price target on Costco Wholesale (NASDAQ: COST) following meetings with management. Analyst Kelly Bania expects ongoing IT modernization spending to remain elevated into calendar 2016 and into 2017.

Bania commented, "Following our visit, we feel even more confident about Costco’s longer-term margin outlook, supported by: 1) ongoing mix shift toward higher-margin international sales (we estimate a roughly +10bps/year); 2) favorable mix-shift benefit from increasing penetration of higher-margin online sales (~3% of sales);3) favorable mix shift toward both slightly higher GM% organics (~$4B annual sales), and private label Kirkland Signature (25% of sales); 3) a benigncompetitive pricing environment (our organic food pricing study shows Costcohas maintained its (40%) price advantage over Whole Foods, similar to thefindings in Dec 2014); 4) annual goals to grow margins within merchandisecategories (though fresh foods sometimes given a pass depending on inflation); 5)stabilizing outlook for health care expenses (cited as a pressure in five of the past seven quarters as HC expenses had been trending +10-11% y/y); 6) potential value from the new upcoming April 2016 Visa/Citi credit card arrangement (though weexpect the majority of savings to be passed onto members, not necessarily in theform of pricing); and 7) Costco’s ability to leverage expenses on a 4-5% comp. However, near-term, we expect ongoing IT modernization spending to remainelevated into calendar 2016 and into 2017 before savings begin to be realized 2-3 years out in areas such as transportation management. Lastly, Costco’s June 2015 base comps were reported +6% (ex-gas) in the U.S. (above Consensus for +5.2%) and +6% internationally (ex-FX) supported by strong traffic of “just under 4%”.We estimate QTD base comps in F4Q15 are running slightly ahead of our model at ~6% in the U.S. (vs. our 5% forecast) and ~7% Internationally (vs. our 6% forecast)."

For an analyst ratings summary and ratings history on Costco Wholesale click here. For more ratings news on Costco Wholesale click here.

Shares of Costco Wholesale closed at $142.72 yesterday.

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