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Costco Earnings Beat Zacks' Expectation

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Costco Wholesale Corporation (COST - Free Report) came out with third-quarter fiscal 2013 results today. The quarterly earnings of $1.04 per share beat the Zacks Consensus Estimate by a couple of cents, and surged 18.2% from 88 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.

Let’s Unveil

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 7.9% to $24,083 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $25,096 million. Net sales jumped 7.8% to $23,552 million, whereas membership fee rose 11.8% to $531 million.

Costco’s comparable-store sales for the quarter ascended 5% buoyed by a 6% and a 4% jump in comparable-store sales in the U.S. and international locations, respectively. The results were adversely impacted by fluctuation in gasoline prices and foreign currencies rate. In the prior-year quarter, the company delivered comparable-store sales growth of 5%.

Excluding the effects of gasoline prices and foreign currencies, the company witnessed comparable-store sales growth of 7%, with U.S. and international sales increasing by an equivalent rate.

Recently, Costco came out with comparable-store sales data for the month of April. The company delivered comparable-store sales growth of 4% in April, following an equal increase in March, and reflecting comparable sales growth of 4% at its U.S. locations and 3% at international outlets. In the prior-year period, the company delivered comparable-store sales growth of 4%.

Costco’s operating income soared 15.9% to $722 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 $5,448 million, long-term debt of $4,887 million, and shareholders’ equity of $10,472 million, excluding non-controlling interests of $175 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. 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 - Free Report) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT - Free 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 627 warehouses, comprising 449 warehouses in the United States and Puerto Rico, 85 in Canada, 33 in Mexico, 24 in the United Kingdom, 15 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 on their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.

Currently, Costco holds a Zacks Rank #3 (Hold). Other stock worth considering in the non-food retail-wholesale sector is Bon-Ton Stores Inc. that carries a Zacks Rank #1 (Strong Buy).

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