Costco's Bottom-Line Rises

Costco Wholesale Corp. (COST - Analyst Report) came out with second-quarter fiscal 2013 results today. The quarterly earnings of $1.24 per share beat the Zacks Consensus Estimate of $1.05, and surged 37.8% from 90 cents earned in the prior-year period.

The boost in the bottom-line was buoyed by growth in the top-line due to rise in membership fees and improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs.

The quarterly earnings was favorably impacted by a tax benefit of 14 cents a share in relation to the percentage of the special cash dividend paid by Costco in Dec 2012 to 401(k) plan participants.

Let’s Unveil

The warehouse retailer’s total revenue, which includes net sales and membership fees, climbed 8.3% to $24,871 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $25,109 million. Net sales jumped 8.2% to $24,343 million, whereas membership fees rose 15% to $528 million.

Costco’s comparable-store sales for the quarter ascended 5% buoyed by a 5% and a 6% jump in comparable-store sales in the U.S. and international locations, respectively. The results were favorably impacted by inflation in gasoline prices and foreign currencies fluctuation. In the prior-year quarter, the company delivered comparable-store sales growth of 8%.

Excluding the effects of gasoline prices and foreign currencies, the company witnessed comparable-store sales growth of 5%, with U.S. sales increasing by an equivalent rate and international sales rising 4%.

Recently, Costco came out with comparable-store sales data for the month of February. After an increase of 4% in January, Costco’s comparable-store sales for February climbed 6%, reflecting comparable sales growth of 6% at its U.S. locations and 4% at international outlets. In the prior-year period, the company delivered comparable-store sales growth of 8%.

Costco’s operating income soared 14.6% to $738 million, whereas operating margin (as a percentage of total revenue) expanded marginally by 20 basis points to 3%.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,413 million, long-term debt of $4,806 million, and shareholders’ equity of $10,112 million, excluding non-controlling interests of $171 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 amidst 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. Costco’s diversification strategy is a natural hedge against risks that may arise in specific markets.

However, Costco faces stiff competition from Target Corporation (TGT - Analyst Report) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT - Analyst Report), 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 622 warehouses, comprising 448 warehouses in the United States and Puerto Rico, 85 in Canada, 32 in Mexico, 23 in the United Kingdom, 13 in Japan, 9 in Taiwan, 9 in Korea, and 3 in Australia.

Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful of their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers during this holiday season. Currently, Costco holds a Zacks Rank #3 (Hold).

Another stock worth considering in the non-food retail-wholesale sector is Sears Holdings Corporation (SHLD - Analyst Report), which carries a Zacks Rank #1 (Strong Buy).