Wednesday, October 30, 2013

Costco Has Room For Growth In Mexico

Costco (COST) is the largest warehouse retailer in the U.S. with over 530 stores in North America and around 100 stores in international markets such as Mexico, the U.K., Japan, Taiwan, Korea and Australia. In terms of store count, Mexico is the third most important market for the company with 33 stores operational at the end of September 2013. Costco started its operations in Mexico through a 50% owned joint venture, and its store count had been stagnant for the past four-five years. However, the warehouse retailer acquired the remaining 50% stake from its partner last year and has opened one store since. Costco plans to add another store in the current quarter and we expect it to continue expanding in Mexico in the future. The retailer has seen robust comparable store sales growth in its Mexican operations and the region's retail market holds tremendous potential. 

Mexico is the second largest economy in Latin America and the 11th most populous country in the world. Over the past few years, Mexico has seen strong growth in its retail industry with a stable economic environment, controlled inflation and increase in credit facilities. The market potential is clearly visible from the fact that the retail giant Wal-Mart (WMT) operates close to 2,500 stores in the region. Although the economic growth has suffered in the recent past, lower interest rates and diluted tax reform should have a positive impact on consumer confidence going forward. Even the prevailing economic weakness bodes well for Costco's growth since the retailer provides its customers with a valuable cost saving shopping option.
Our price estimate for Costco stands at around $125, implying a premium of about 5% to the market price.

Mexican Retail Market Holds Good Potential
Historically, Mexico's retail industry has remained strong as the region has sustained its economic growth and kept inflation under control. What's promising is that the retail market growth exceeded the country's GDP growth last year. 

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