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Costco (COST) Down 10.1% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Costco Wholesale Corporation (COST - Free Report) . Shares have lost about 10.1% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Costco Q3 Earnings Beat Amid Tough Retail Scenario    

After reporting negative earnings surprises in the first and second quarters of fiscal 2017, Costco Wholesale Corporation made a strong come back with earnings beat in the third quarter, consequently sidelining the woes which have gripped the brick-and-mortar retailers for some time now. Total revenue also came ahead of the Zacks Consensus Estimate breaking its long streak of missing the same in the preceding nine quarters.

This Issaquah, WA-based company posted adjusted quarterly earnings of $1.40 per share that surpassed the Zacks Consensus Estimate of $1.31 and increased 12.9% from the prior-year period. Total revenue, which includes net sales and membership fee, came in at $28,860 million that edged past the Zacks Consensus Estimate of 28,654 million and jumped 7.8% 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. The company in the last quarter had announced that effective Jun 1, 2017 it will raise annual membership fees.

The company’s Citi Visa co-brand card program favorably impacted the margins, SG&A expenses and the bottom line.

Delving Deeper

Third-quarter net sales were up 7.9% to $28,216 million, while total membership fee increased 4.2% to $644 million. However, we noticed that the rate of increase in total membership fee decelerated from 5.5% registered in the second quarter. Online sales jumped 11% during the quarter.

Costco’s comparable-store sales (comps) for the quarter improved 5%, reflecting an increase of 2% in average transaction and little over 3% in average shopping frequency. The company witnessed comps growth of 6%, 2% and 4% across the U.S., Canadian and Other International locations, respectively.

Excluding the effect of gasoline prices and foreign exchange, the company witnessed comps growth of 5% during the quarter, with the U.S., Canada and Other International comps registering growth of 5%, 3% and 6%, respectively.

Costco has been witnessing comps growth for quite some time now. Comps have increase 3% in April, 6% in March, 4% in February and 7% in January. Notably, net sales increased 5% 9%, 8% and 9% in April, March, February and January, respectively.

Costco’s operating income in the quarter increased 12.8% year over year to $968 million, while operating margin (as a percentage of total revenue) expanded 20 basis points to 3.4%.

Store Update

Costco operates 732 warehouses, comprising 510 warehouses in the U.S. and Puerto Rico, 95 in Canada, 37 in Mexico, 28 in the UK, 25 in Japan, 13 in Korea, 13 in Taiwan, eight in Australia, two in Spain and one in Iceland. Management plans to open 12 more locations in fiscal 2017, thus taking the total store opening count to 26 net locations for the fiscal year.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,538 million and long-term debt (including current portion) of $3,979 million. The company’s shareholders’ equity was $9,898 million, excluding non-controlling interests of $287 million. Management incurred capital expenditures of approximately $538 million during the quarter. The company anticipates capital expenditures in the range of $2.5–$2.7 billion for fiscal 2017. During the quarter, the company repurchased shares worth of $45 million.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to three lower.

VGM Scores

At this time, the stock has a great Growth Score of 'A', a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of 'B' on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth and momentum investors than value investors.

Outlook

While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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