9/1/2011
By Brian Sozzi, Research Analyst

What will get lost in the CEO departure sauce, and rightfully so, is that Costco (COST) had another bang up month of sales.  August was a period like many others for Costco throughout the economic recovery, showcasing an upper middle income consumer continuing to be fully engaged in the process of saving where applicable.  Furthermore, the acceleration in Costco's traffic month to month, off already stellar levels, coincides with an ongoing consolidation of trips by households to those destinations conveying one-stop shopping convenience or unmatched value, two top names here being Costco and Target (TGT).  From an investment standpoint the important takeaways included:

* 4Q11 net sales of $27.6 billion brought a wow factor to the table because this tally excludes membership sales, which were likely strong.  Costco cashed in during the quarter on the powerful combination of robust traffic plus inflation in food, sundries, and fresh food.  As Costco has stated in the past, its margins tend to do very well in bouts of modest inflation as seen in 4Q11. 
* California back again as a source of strength.
* Hurricane Irene had a slight net negative impact on the month given Northeast temporary club closures.  Sure will be interesting to feast one's eyes on the monthly sales from specialty apparel retailers.
* Fun thought: With this type of quarter in the books (strong) and a significant amount of cash as a percentage of total assets (highest in the big box retail sector) Costco theoretically could issue a meaningful dividend increase in the immediate future.

The Supersized News

I think the announcement that Jim Sinegal was stepping aside as CEO of Costco at year end was something in the making since Craig Jilenek, who will be talking over this giant warehouse ship, was appointed as President and COO in February 2010.  Jilenek has seriously big, big shoes to fill.  I would compare it to the torch being passed to Lou Gehrig from Babe Ruth.  Keep in mind, Sinegal is not just any ole founder.  This is a man who pioneered how we consume goods and services on a daily basis, bringing an entirely new retail model to life.  If Sam Walton gets credit for creating discount retail as we know it, than Jim Sinegal deserves oodles of praise for thinking outside of the box (enormous package sizes plus having the stores representing the warehouse, instead of operating numerous distribution facilities).  If one wants to say he is the Steve Jobs of warehouse retailing, I would be perfectly comfortable with that characterization.

That said, Sinegal has been going nonstop for years, and surely would like to enjoy the golden years so to speak.  He leaves a very able team, and a new CEO that indeed has Costco in the blood.  Will there be an unwinding of the "Sinegal Premium" so inherent in Costco shares?  Maybe.  I would be quick to counter than Costco has its model down to a science, so it's not like the new CEO is going to come in their guns blazing and change things up.  If it ain't broke, don't fix it.

Brian Sozzi
Wall Street Strategies

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