Retail giants Costco (click ticker for report: ) and Target (click ticker for report: ) reported better than expected August same store sales growth. Costco, excluding the impact of currency and higher gasoline, reported 6% same store sales growth, better than the consensus estimate of 4.5%. Target reported solid 4.7% same store sales growth during August, well above the consensus expectation of 3.1%.
Though consumer confidence has wavered recently (in August, the index hit its lowest level since November), Costco has posted strong comparable sales growth throughout the summer. Food inflation may be tacking on some price increases, but we think Costco’s strong results reveal the firm’s strong business model and loyal customers. Whether due to cost savings or simply the convenience of buying in bulk, we love Costco’s ongoing focus on delivering a good warehouse experience without raising prices (too much). We’re confident in the firm’s earnings resiliency regardless of macroeconomic headwinds; however, shares only score a 6 on the Valuentum Buying Index (our stock-selection methodology), so we aren’t terribly interested at this time.
Target’s solid August was a result of superb execution, in our view. The dollar stores segment has been experiencing slowing growth, which we think is a result of consumers trading up to Target. Even though the company is not a luxury retailer, we think the perceived quality of its products offers a leg-up on Wal-Mart (click ticker for report: ), as well as the dollar store cohort. And counter to the recent consumer confidence reading, we believe strong performance at Target is a positive incremental sign that consumers can afford to spend a bit more on necessities. Though we believe Target’s shares may have modest upside to $74 per share (the high end of our fair value range), it scores a 6 on the Valuentum Buying Index (our stock-selection methodology), so we’re not too interested in the risk/reward opportunity at this time. We prefer firms in our Best Ideas portfolio, or for dividend-growth investors, companies in our Dividend Growth portfolio.