Costco Wholesale stock climbs to record high after China debut

Costco Wholesale Corporation (NASDAQ: COST) stock headed to a new record high of $299.94 on Wednesday following its first store debut in China. The membership warehouses operator restricted the number of China shoppers to 2,000 after a crazy massive turnout.

At the store opening on Tuesday, the American retail giant experienced a heavy rush of customers who were willing to wait for hours and fight over discounted products. Following this, Costco suspended the Shanghai store operations in the afternoon citing to heavy customers traffic. The company made the decision to cap the number of customers to 2,000 on Wednesday.

Costco’s entry into China comes amid the worsening trade war. The tit-for-tat tariff battle showed no signs of slowing down and is making US firms to remain cautious on investments made in China. Market analysts believe Costco could yield better productivity with its new stores as its subscription model is less risky than other retail chains.

The company achieves sales growth by opening new warehouses. As Costco’s warehouse base grows, available and desirable potential sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The rate of square footage growth is generally higher in foreign markets due to the smaller base in those markets.

Costco’s membership format has a significant effect on its profitability. The company’s financial performance depends heavily on its ability to control costs. As the business is operated on very low margins, modest changes in various items in the income statement, specifically costs and SG&A expenses, could have substantial impacts on the bottom line.

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For the third quarter, membership fee revenue rose by 5% primarily due to sign-ups at existing and new warehouses and the annual fee increase in the US and Canada on June 2017. The company has a total debt of $6.5 billion while having sufficient cash and short-term investments in the hand of $8.16 billion.

It is expected that the cash could decline in this quarter due to the first store opening in China. However, the company is likely to be beneficial from the customers flooding in the store as well as an increase in comparable sales. Market analysts expect Costco to open more stores in China for satisfying customers requirement.

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