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Earnings Scorecard: Costco - Analyst Blog

Costco Wholesale Corporation ( COST ) recently posted first-quarter 2012 results that came in line with the Zacks' expectation. Street analysts had enough time to ponder on the company's scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

Costco unveiled its first quarter financial results on December 8. The quarterly earnings of 80 cents a share met the Zacks Consensus Estimate, and rose 12.7% from 71 cents earned in the prior-year quarter.

The increase in the bottom-line was buoyed by double-digit growth in the top-line due to improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs.The company's international operations has been the major driver.

The warehouse retailer's total revenue, which includes net sales and membership fees, climbed 12.4% to $21,628 million from the prior-year quarter. Net sales jumped 12.5% to $21,181 million, whereas membership fees rose 7.5% to $447 million. The Zacks Consensus Estimate for the quarter was $21,293 million.

Costco's comparable-store sales for the quarter rose 10%, reflecting a comparable sales growth of 10% at its U.S. locations and 11% at its international divisions. The results were favorably impacted by rising gasoline prices and strengthening of foreign currencies.

Agreement of Estimate Revisions

Clearly, a mixed sentiment is evident among analysts covering the stock. The agreement of estimate revisions indicates that the analysts are not unidirectional following Costco's first-quarter 2012 results.

In the last 7 days, 5 out of 22 analysts covering the stock lowered their estimates, whereas only one analyst raised the same for the second quarter of 2012. For the third quarter, 6 analysts raised their estimates, with only one making a downward revision.

For fiscal 2012, 4 analysts moved their estimates up, with an equal number of analysts revising the same downward in the last 7 days. For fiscal 2013, 4 analysts increased their estimates with similar number of analysts lowering the same.

Magnitude of Estimate Revisions

The magnitude of estimate revisions by the analysts is clearly reflected in the changes in the Zacks Consensus Estimates.

The Zacks Consensus Estimates remained decreased by a penny to 89 cents for the second quarter of 2012, but rose by a penny to 87 cents for the third quarter, in the last 7 days.

For fiscal 2012, the Zacks Consensus Estimate jumped by a penny to $3.85 in the last 7 days. For fiscal 2013, the Zacks Consensus Estimate dropped by 3 cents to $4.38.

Our Take

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it offers. The company's strategy to sell products at heavily discounted prices has helped it to sustain growth in beleaguered economic conditions as cash-strapped customers continue to see Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is strongly positioned in the warehouse club industry.

A differentiated product range enables Costco to provide upscale shopping experience to its members, resulting in market share gains and higher sales per square foot. Moreover, the company continues to maintain a healthy membership renewal rate.

Costco also remains committed to opening new clubs in domestic and international markets. The company's diversification strategy is a natural hedge against risks that may arise in specific markets.

After the Black Friday sales blast, there is skepticism in the market whether the success of weekend sales will be replicated during Christmas and New Year, or whether consumers who have now become more rational about spending will tighten their purses.

However, the efforts of retailers to convert store traffic into business cannot be decried as they are trying to lure customers. But it definitely remains a wait-and-watch story as to who emerges successful in wooing consumers in this distressed economy.

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 huge 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.

Currently, we maintain our long-term 'Neutral' recommendation on the stock. Moreover, Costco holds a Zacks #3 Rank that translates into a short-term 'Hold' rating, and correlates with our long-term view.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These "Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

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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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