Costco Wholesale Corporation (COST) Earnings Miss Estimate, Up Y/Y

Updated on

Costco Wholesale Corporation (COST) came out with its first-quarter fiscal 2014 results today. The quarterly earnings of 96 cents a share missed the Zacks Consensus Estimate of $1.02 but came a penny ahead of the prior-year quarter earnings.

Shares of Costco fell 5.6% to $114.83 during pre-market trading hours.

Let’s Unveil Further

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 5.5% to $25,017 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $25,232 million. Moreover, the top-line growth rate accelerated to 5.5% in the reported quarter from 0.8% in fourth-quarter of fiscal 2013. Quarterly net sales rose 5.4% to $24,468 million, whereas membership fee rose 7.4% to $549 million.

Costco’s comparable-store sales for the quarter increased 3% buoyed by a 3% and 1% rise in comparable-store sales in the U.S. and international locations, respectively. The results were adversely affected by deflation in gasoline prices and fluctuation in foreign currencies rate. In the year-ago quarter, the company delivered comparable-store sales growth of 7%.

Excluding the effect of lower gasoline prices and foreign currencies, the company witnessed comparable-store sales growth of 5%, with U.S. and international comps increasing by 4% and 6%, respectively.

Recently, Costco came out with comparable-store sales data for the month of November. The company delivered comparable-store sales growth of 2%, following an increase of 3% in October, and registered comparable sales growth of 2% at its U.S. locations and 1% at its international locations.

Excluding the effect of gasoline prices and foreign currencies, the company witnessed comparable-store sales growth of 4% for the month of November, with the U.S. and international comps rising by 3% and 6%, respectively.

Net sales for the month jumped 5% to $8.78 billion from $8.40 billion.

Coming to the quarter, Costco’s operating income jumped 4.5% to $668 million, whereas, operating margin (as a percentage of total revenue) remained flat at 2.7%.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,699 million, long-term debt of $4,987 million, and shareholders’ equity of $11,221 million, excluding non-controlling interests of $188 million.

Let’s Conclude

Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandises it offers. The company’s strategy to sell products at heavily discounted prices has helped it sustain growth amid beleaguered economic conditions, as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities.

Having delivered consistent comparable-store sales growth, the company is well positioned in the warehouse club industry. The company’s diversification strategy is a natural hedge against risks that may arise in specific markets.

However, Costco faces stiff competition from Target Corp. (TGT) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT), which follows a similar business model that pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition may depress sales and margins.

Costco currently operates 648 warehouses, comprising 461 warehouses in the United States and Puerto Rico, 87 in Canada, 33 in Mexico, 25 in the United Kingdom, 18 in Japan, 10 in Taiwan, 9 in Korea, and 5 in Australia.

Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful on their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.

Currently, Costco holds a Zacks Rank #4 (Sell). The other better ranked stock worth considering in the retail sector is PriceSmart Inc. (PSMT) that carries a Zacks Rank #2 (Buy).

COSTCO WHOLE CP (COST): Free Stock Analysis Report

PRICESMART INC (PSMT): Free Stock Analysis Report

TARGET CORP (TGT): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research

Leave a Comment