Costco: A Bargain?

Warehouse shopping is going upscale. To attract sophisticates, members-only Costco Wholesale (COST ) is sprucing up its shelves with high-ticket wine and fresh foods, such as filet mignon and caviar. The club chain is expanding its high-end furniture selection in some stores, too.

The plan is to inspire its 19 million cost-conscious customers to shell out even more than an average $103 per visit. On Dec. 12, Costco posted fiscal first-quarter earnings of $145.7 million on $9 billion in revenue. The numbers represented a 12% hike in profits over last year, but same-store sales growth slowed from an average of 6% in the previous 12 months to just 2% in the last two months. Costco cut its outlook for both the fiscal second quarter ending in February and for the rest of the year. A disheartened market pushed shares to a new low of 27.09, continuing a year-long drubbing:The stock lost 37% in 2002 as investors dumped retail stocks, reflecting doubts that consumers could keep spending. Robert Hoehn, Fulcrum Global Partners research director, says the sell-off is overdone. "This is a good opportunity for Costco to expand [its] profits," he says. He estimates Costco profits of $1.62 a share in its next fiscal year, and $1.90 for fiscal 2004. His 12-month price target: 42.

Obstacles are "more a function of the economy than Costco's business model," adds Marie Driscoll, a senior analyst with Argus Research, who sees the stock at 40 in 12 months. "It's in a good position to bounce back."

By Mara Der Hovanesian

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