Costco (COST) Earnings and Revenues Miss Estimates in Q1

After posting a positive earnings surprise of 2.3% in the final quarter of fiscal 2016, Costco Wholesale Corporation COST delivered a negative earnings surprise of 1.7% in the first quarter of fiscal 2017. Total revenue also fell short of the Zacks Consensus Estimate for the eighth straight quarter. The trend is reflected in the stock’s year-to-date performance, which shows that it has declined 6.5%, compared with the Zacks categorized Retail-Discount & Variety industry’s 6.5% gain.

Costco posted adjusted earnings of $1.17 per share that missed the Zacks Consensus Estimate by a couple of cents. Total revenue, which includes net sales and membership fee, came in at $28,099 million and fell short of the Zacks Consensus Estimate of 28,384 million.

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However, despite the weaker-than-expected results, Costco’s shares inched up 1.4% during aftermarket trading yesterday. The upside was likely driven a year-over-year improvement in both the top and the bottom line of this warehouse club chain operator.

Total revenue grew 3.2% from the year-ago quarter, while adjusted quarterly earnings were up 7.3%. The bottom line benefited from lower credit card fees on account of a switch to Visa from American Express. The company managed to survive challenges like stiff competition and food price deflation that have been weighing upon the sector’s performance and allay investor concerns to some extent.

Delving Deeper

Quarterly net sales were up 3.2% to $27,469 million, whereas membership fee increased 6.2% to $630 million. Management informed that online sales climbed 8% in the quarter.

Costco’s comparable-store sales (comps) for the quarter improved 1%. The company witnessed comps growth of 1% and 4% across its U.S. and Canadian locations, respectively. However, comps at the Other International locations remained flat.

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

Costco’s operating income in the quarter surged 10.7% year over year to $849 million, whereas operating margin (as a percentage of total revenue) expanded 20 basis points to 3%.

Store Update

Costco operates 723 warehouses, comprising 506 warehouses in the U.S. and Puerto Rico, 94 in Canada, 36 in Mexico, 28 in the UK, 25 in Japan, 12 in Korea, 12 in Taiwan, 8 in Australia, and 2 in Spain.

During the quarter, the company opened 8 net new locations and completed one relocation. In fiscal 2017, the company plans to open a total of 34 locations, including 3 relocations. Of the 31 net new locations, the company will open 16 in the U.S., 8 in Canada, and one each in Taiwan, Korea, Japan, Australia, Mexico, France and Iceland.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,805 million and long-term debt (including current portion) of $3,933 million. The company’s shareholders’ equity was $11,973 million, excluding non-controlling interests of $258 million. Management incurred capital expenditures of approximately $670 million during the quarter. The company anticipates capital expenditures in the range of $2.6–$2.8 billion for fiscal 2017. During the quarter, the company repurchased 809,000 shares for a total of $122 million.

Let’s Conclude

Costco continues to be one of the dominant retail wholesalers based on 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, the UK, Mexico, Korea and Taiwan.

However, Costco faces stiff competition Sam’s Club, a division of Wal-Mart Stores Inc. WMT which follows a similar business model, pushing through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid competitive pressure may dampen sales and margins, going forward.

Zacks Rank & Key Picks

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

Burlington Stores delivered an average positive earnings surprise of 25.6% over the trailing four quarters and has a long-term earnings growth rate of 19.9%.

Ross Stores delivered an average positive earnings surprise of 5% over the trailing four quarters and has a long-term earnings growth rate of 11.4%.

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