Discount Retail Speculation: Buy this wholeseller now!

Discount Retail Speculation: Buy this wholesaler now!

Today's Financial News - Posted February 7, 2008

A Today’s Financial News Research Report:
‘Imagine my surprise when I pulled up on our Costco parking lot last weekend. It was crammed full. Plenty of people were maneuvering sets of brand new mattresses, flat-screen TVs, and slabs of prime beef that would make a French chef’s upper lip twitch. If there’s a retail crunch, somebody should tell them.’ – J. Christoph Amberger

By J. Christoph Amberger, TodaysFinancialNews.com

Today’s Financial News feed provides an independent and practical perspective on the U.S. and global investment markets.

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The following is the TFN Hot Stock Pick for this week selected by J. Christoph Amberger. Click here to watch the financial video.

Baltimore (TFN): At the beginning of a potential recession discount retailers appear to be a natural candidate to benefit from anticipated changes in consumer spending. And indeed, the current economic climate may seem detrimental to sales volumes an profit margins of retailers: The markets are down. From the President down to the lowliest finance journalists, optimism has evaporated from the economic outlook. You’d be justified to expect stores empty, malls deserted, parking lots abandoned as U.S. consumers get religion, tighten their belts, and switch from Ho-Hos to Dr. Ron Paul’s codliver oil and hard money diet.

Imagine my surprise when I pulled up on our Costco parking lot last weekend to stock up on supplies necessary to feed two teenage boys. It was crammed full. Suspecting Superbowl purchases as the main motivator, I scanned fellow shoppers carts: There was not a bag of Doritos among them. Instead, plenty of people were maneuvering sets of brand new mattresses, flat-screen TVs… and slabs of prime beef that would make a French chef’s upper lip twitch.

If there’s a retail crunch, somebody should tell them.

Tired of reading? Just watch the financial video…

Discount retailers will benefit from a shift in consumer spending habits

Costco experienced 15.7% earnings growth in the last quarter ended November. The company is far less stretched financially than its competitor Wal-Mart. It has more assets on hand and a better ratio of assets to debt (quick ratio of 0.48 vs 0.19). Costco’s sales also grew at a faster rate (11.72% vs 8.86%) in the last quarter.

The ace up its sleeve is not only its refreshingly non-controversial, community-oriented business philosophy. It lies in its customer base. Its 50.4 million cardholders account for $64.4 billion in annual revenues, almost evenly split between private households and businesses. Business is conducted either cash, check or Amex charge card, which means Costco customers typically represent a more solid and liquid core clientele than WalMart’s.

So why did the stock price just drop just drop from $72 in December to $65?

They fought the law and the law won

One reason is that Costco just lost a battle against the Washington state Liquor Control Board, which has a series of regulations designed, according to its own statements, to keep alcohol prices high and prevent excessive buying.

The 9th Circuit Court judge knocked down Costco’s complaint against the laws, which required 10% markups each time wine or beer passed through a wholesaler or retailers hands. It also prevents volume discounts; prevents retailers from buying beer and wine on credit; prevents retailers from storing wine or beer at a central warehouse; and requires wholesalers to post wine and beer prices with the state and hold them for 30 days.

Costco’s P/E ratio is still high compared to Walmart’s, but I think it still is a good buy at current levels.

Buy COST at current prices around or below $65, for medium-term gains of 15-20% by mid-year.

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