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Costco Beats on Q4 Earnings Yet Investors Remain Wary

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After the closing bell yesterday, Costco Wholesale CorporationCOST reported its fourth-quarter fiscal 2015 results, wherein earnings of $1.73 per share increased 9.5% from the prior-year quarter and surpassed the Zacks Consensus Estimate of $1.66. With this earnings beat, the company has outperformed the Zacks Consensus Estimate for the fifth straight quarter.

Despite this positive surprise, not much enthusiasm was witnessed among investors, as the stock fell 1.2% during after-market trading hours. We believe that concerns over Costco's disappointing comparable-store sales (comps) performance made investors skeptical about this Zacks Rank #4 (Sell) stock.

Delving Deeper

The warehouse retailer's total revenue, which includes net sales and membership fee, inched up 0.7% to $35,778 million in the reported quarter. Quarterly net sales rose 0.7% year over year to $34,993 million, whereas membership fee increased 2.2% to $785 million. However, total revenue fell short of the Zacks Consensus Estimate of $36,259 million, thus marking the third consecutive quarter of revenue miss.

Costco's comps for the quarter fell 1%, reflecting a 10% decline in locations at Canada and a 7% drop at other international outlets, partially offset by a 2% increase at U.S. locations. Comps dipped 2% in August following flat comps in July and a fall of 1% registered in June. While lower gasoline prices impacted U.S. comps, currency fluctuations adversely affected international comps.

Excluding the effect of lower gasoline prices and currency headwinds, the company witnessed comps growth of 6% during the quarter, with U.S., Canada and other international comps registering an increase of 6%, 7% and 6%, respectively.

Costco's operating income in the quarter under review rose 6% year over year to $1,156 million, whereas operating margin (as a percentage of total revenue) expanded 10 basis points to 3.2%.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,801 million and long-term debt (including current portion) of $6,147 million. The company's shareholders' equity was $10,617 million, excluding non-controlling interests of $226 million.

Let's Conclude

Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandise it offers. Its strategy to sell products at highly discounted prices has helped in sustaining growth amid soft economic conditions. Also, 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 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 686 warehouses, comprising 480 warehouses in the U.S. and Puerto Rico, 89 in Canada, 36 in Mexico, 27 in the U.K., 23 in Japan, 12 in Korea, 11 in Taiwan, 7 in Australia, and 1 in Spain.

Stock that Warrant a Look

A better-ranked stock in the retail space is Burlington Stores, Inc. BURL , which carries a Zacks Rank #2 (Buy).

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

TARGET CORP (TGT): Free Stock Analysis Report

COSTCO WHOLE CP (COST): Free Stock Analysis Report

BURLINGTON STRS (BURL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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