Costco (COST) Q4 Earnings Top, Stock Down on Margins Woe

Costco Wholesale CorporationCOST ended fiscal 2017 on a positive note, with both the top and bottom line beating the Zacks Consensus Estimate for the second straight quarter. The company's results were driven by growth in membership fees, which it raised effective Jun 1, 2017. We believe that the recent hike in annual membership fees and increased penetration of Citi Visa co-brand card program will continue to benefit stock in the near term.

However, despite reporting better-than-expected in the quarter under review, the company's shares declined nearly 3% during after-market trading session yesterday as contraction in margin alarmed investors.

This Issaquah, WA-based company posted adjusted quarterly earnings of $2.08 per share that surpassed the Zacks Consensus Estimate of $2.02 and increased 17.5% from the prior-year period. Total revenues, which include net sales and membership fee, came in at $42,300 million that edged past the Zacks Consensus Estimate of 41,739 million and jumped 15.7% year over year.

Major chains are grappling with sluggish store and mall traffic as consumers choose to shop online from the comfort of their homes. But Costco seems somewhat resilient to the challenging retail backdrop. We noted that in the reported quarter the company's e-commerce sales increased 21%, this gives an indication that the company's efforts to drive online sales bode well.

Meanwhile, Costco which has been trying all means to push online sales launched new delivery options for its customers. Per the new delivery options, the company is not only offering two days delivery but is also providing customer same-day delivery choices.

Costco Wholesale Corporation Price, Consensus and EPS Surprise

Costco Wholesale Corporation Price, Consensus and EPS Surprise | Costco Wholesale Corporation Quote

Delving Deeper

Fourth-quarter net sales were up 15.8% to $41,357 million, while membership fee increased 13.3% to $943 million. Moreover, we noticed that the rate of increase in membership fee accelerated from 4.2% registered in the third quarter.

Costco's comparable-store sales (comps) for the quarter improved 6.1%. The company witnessed comps growth of 6.5%, 4.9% and 5.6% across the United States, Canadian and Other International locations, respectively.

Excluding the effect of gasoline prices and foreign exchange, the company witnessed comps growth of 5.7% during the quarter with the United States, Canada and Other International registering comps growth of 5.8%, 4.8% and 6%, respectively.

Costco has been witnessing comps growth for quite some time now driven by improved store traffic and average transaction size. Comps for September increased 8.9%, following an increase of 7.3% in August, 6.2% in July, 6% in June, 4.1% in May, 3% in April, 6% in March, 4% in February and 7% in January. Notably, net sales increased 12.1%, 10%, 8.8%, 7%, 7%, 5%, 9%, 8% and 9% in September, August, July, June, May, April, March, February and January, respectively. In a one year, the stock has advanced 11.4% and comfortably outperformed the industry 's growth of 4.1%.

Costco's operating income in the quarter increased 21.7% year over year to $1,450 million, while operating margin (as a percentage of total revenues) expanded 20 basis points to 3.5%. However, gross margin as a percentage of net sales contracted 15 basis points to 11.3%.

Store Update

Costco operates 741 warehouses, comprising 514 warehouses in the United States and Puerto Rico, 97 in Canada, 37 in Mexico, 28 in the UK, 26 in Japan, 13 in Korea, 13 in Taiwan, nine in Australia, two in Spain and one each in Iceland and France.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,546 million and long-term debt (including current portion) of $6,659 million. The company's shareholders' equity was $10,778 million, excluding non-controlling interests of $301 million.

Let's Conclude

The Zacks Rank #2 (Buy) company 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 eCommerce capabilities in the United States, Canada, UK, Mexico, Korea and Taiwan.

However, Costco faces stiff competition from 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. Consequently, aggressive pricing to gain market share and drive traffic amid competitive pressure may dampen sales and margins.

Other Key Picks

Other top-ranked stocks which warrant a look in the retail space include PVH Corp. PVH and Burlington Stores, Inc. BURL both carrying a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

PVH Corp. delivered an average positive earnings surprise of 3.6% in the trailing four quarters and has a long-term earnings growth rate of 13.1%.

Burlington Stores delivered an average positive earnings surprise of 17.7% in the trailing three quarters and has a long-term earnings growth rate of 16.2%.

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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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