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Costco Earnings Miss Estimate, Up Y/Y - Analyst Blog

By: Zacks.com
Posted: 10/9/2013 10:28:00 AM
Referenced Stocks: COST;DG;TGT;WMT

Costco Wholesale Corporation ( COST ) came out with its fourth-quarter fiscal 2013 results today. The quarterly earnings of $1.40 per share came ahead of the prior-year quarter earnings of $1.39. However, the earnings missed the Zacks Consensus Estimate of $1.46 per share as the rate of increase in sales decelerated.

Let's Unveil Further

The warehouse retailer's total revenue, which includes net sales and membership fee, climbed 0.8% to $32,487 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $32,702 million. Moreover, the top-line growth rate narrowed to 0.8% in the reported quarter from 7.9% in third-quarter of fiscal 2013. Quarterly net sales rose 0.8% to $31,771 million, whereas membership fee rose 3.2% to $716 million.

Costco's comparable-store sales for the quarter increased 5% buoyed by a 5% and a 4% rise in comparable-store sales in the U.S. and international locations, respectively. The results were adversely affected by fluctuation in foreign currencies rate. In the year-ago quarter, the company delivered comparable-store sales growth of 5%.

Excluding the effect of foreign currencies, the company witnessed comparable-store sales growth of 5%, with U.S. and international comps increasing by 5% and 7%, respectively.

Recently, Costco came out with comparable-store sales data for the month of September. The company delivered comparable-store sales growth of 3%, following an increase of 4% in August, and registered comparable sales growth of 4% at its U.S. locations. In the prior-year period, the company delivered comparable-store sales growth of 6%.

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

Net sales for the month increased 6% to $9.86 billion from $9.33 billion.

Coming to the quarter, Costco's operating income inched up 0.5% to $954 million, whereas, operating margin (as a percentage of total revenue) remained flat at 2.9%.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,644 million, long-term debt of $4,998 million, and shareholders' equity of $10,833 million, excluding non-controlling interests of $179 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 Corporation ( 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 638 warehouses, comprising 454 warehouses in the United States and Puerto Rico, 85 in Canada, 34 in Mexico, 25 in the United Kingdom, 18 in Japan, 10 in Taiwan, 9 in Korea, and 3 in Australia. The company plans to open 11 more new warehouses before this calendar year ends.

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 #3 (Hold). The other stock worth considering in the retail sector is Dollar General Corporation ( DG ) that carries a Zacks Rank #2 (Buy).



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