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Costco (COST) Beats on Q4 Earnings, Misses on Revenue

Zacks Equity Research
Updated

Costco Wholesale Corporation COST posted fourth-quarter fiscal 2016 earnings of $1.77 per share that beat the Zacks Consensus Estimate of $1.73 and also increased 2.3% from the prior-year quarter. The warehouse club chain’s bottom line benefited from lower credit card fees on account of its switching over to Visa from American Express.

The company managed to sail through high tides and to an extent succeeded in allaying investors’ fears, amid stiff competition and food price deflation that have been weighing upon the sector’s performance. Shares were up roughly 2% during after-market trading hours yesterday.

Delving Deeper

Total revenue, which includes net sales and membership fee, rose 2.2% year over year to $36,560 million in the reported quarter. Quarterly net sales went up 2.1% to $35,728 million, whereas membership fee increased 6% to $832 million. However, total revenue fell short of the Zacks Consensus Estimate of $36,574 million. This marked the seventh straight quarter of revenue miss for the company.

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Costco’s comparable-store sales (comps) for the quarter remained flat. The company witnessed a 2% increase in comps across its Canadian locations, offset by a 1% and 2% decline registered at its U.S. and Other International locations.

Excluding the effect of lower gasoline prices and foreign exchange, the company witnessed comps growth of 3% during the quarter, with U.S., Canada and Other International comps registering an increase of 2%, 5% and 1%, respectively.

Costco’s operating income in the quarter under review rose 3% year over year to $1,191 million, whereas operating margin (as a percentage of total revenue) expanded 10 basis points to 3.3%.

COSTCO WHOLE CP Price and Consensus

COSTCO WHOLE CP Price and Consensus | COSTCO WHOLE CP Quote

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $3,379 million, and long-term debt (including current portion) of $5,161 million. The company’s shareholders’ equity was $12,079 million, excluding non-controlling interests of $253 million.

Let’s Conclude

Costco continues to be one of the dominant retail wholesalers based on its breadth and quality of merchandise offered. A differentiated product range enables the company to ensure an upscale shopping experience for its members, resulting in market share gains. Moreover, Costco continues to maintain a healthy membership renewal rate. It is also gradually expanding its e-commerce capabilities in the U.S., Canada, U.K., Mexico, Korea and Taiwan.

However, Costco faces stiff competition Sam’s Club, a division of Wal-Mart Stores Inc. WMT that follow a similar business model, which 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, going forward.

Costco currently operates 715 warehouses, comprising 501 warehouses in the U.S. and Puerto Rico, 91 in Canada, 36 in Mexico, 28 in the U.K., 25 in Japan, 12 in Korea, 12 in Taiwan, 8 in Australia, and 2 in Spain. The company plans to open 9 more new warehouses (including one relocation) before the end of this year.

Zacks Rank

Costco currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail space are Big Lots Inc. BIG and Burlington Stores, Inc. BURL both holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Big Lots delivered an average positive earnings surprise of 8% over the trailing four quarters and has a long-term earnings growth rate of 13.4%.

Burlington Stores delivered an average positive earnings surprise of 16.1% over the trailing four quarters and has a long-term earnings growth rate of 18.4%.

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