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Costco (COST) Down 0.8% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Costco (COST - Free Report) . Shares have lost about 0.8% in that time frame, underperforming the S&P 500.

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

Costco’s Q1 Earnings Beat, E-commerce Sales Surge

Costco Wholesale Corporation put up a stellar performance in first-quarter fiscal 2021, wherein both the top and the bottom lines not only beat the Zacks Consensus Estimate but also improved year over year. Notably, this operator of membership warehouses maintained its decent comparable sales run. The company’s e-commerce sales have also been showcasing strength owing to stay-at-home trend amid the ongoing pandemic.

The results reflected an expense for COVID-19 premium wages of $212 million pre-tax or 35 cents a share.

Q1 Earnings & Sales Picture

Costco reported adjusted earnings of $2.29 per share — excluding tax benefits of 33 cents — that comfortably surpassed the Zacks Consensus Estimate of $2.04. This marked the second straight quarter of positive earnings surprise. Markedly, the bottom line improved sharply from adjusted earnings of $1.73 per share in the year-ago period. The prior-year adjusted figure excludes tax benefit of 17 cents related to stock-based compensation.

Total revenues, which include net sales and membership fee, were $43,208 million, up 16.7% from the prior-year quarter. The figure also outpaced the Zacks Consensus Estimate of $43,155 million.

Undoubtedly, Costco’s growth strategies, better price management, decent membership trends and increasing penetration of e-commerce business have been contributing to its performance. Thanks to its status of “essential retailer,” the company has been benefiting from coronavirus-induced spike in demand.

In the reported quarter, the company’s e-commerce comparable sales rose 86.4% year over year. Excluding the effect of gasoline prices and foreign exchange, the same exhibited an improvement of 86.2% year over year.

With the prevailing trend of digital transformation in the sector, retailers are rapidly adopting the omni-channel mantra to provide a seamless shopping experience, be it offline or online. Costco, which shares space with Dollar Tree (DLTR), Dollar General (DG) and Target (TGT), has been following the trend. Costco operates e-commerce sites in the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia.

Delving Deeper

Costco’s net sales grew 16.9% to $42,347 million, while membership fee increased 7.1% to $861 million in the reported quarter. Comparable sales climbed 15.4%, reflecting an improvement of 14.6%, 16.2% and 18.7% in the United States, Canada and Other International locations, respectively. We note that shopping frequency rose 5.5% globally and 7.6% in the United States.

Excluding the impact of foreign currency fluctuations and gasoline prices, the company witnessed comparable sales growth of 17.1% during the quarter. Notably, the United States, Canada and Other International locations registered comparable sales increase of 17%, 16.8% and 17.7%, respectively.

Notably, operating income in the quarter increased 34.8% year over year to $1,430 million, while operating margin (as a percentage of total revenues) expanded 40 basis points to 3.3%.

Store Update

Costco currently operates 803 warehouses, comprising 558 in the United States and Puerto Rico, 102 in Canada, 39 in Mexico, 29 in the United Kingdom, 27 in Japan, 16 in Korea, 14 in Taiwan, 12 in Australia, three in Spain, and one each in Iceland, France, and China. The company opened eight net new units during the quarter under review. Management plans to open 20-22 units in fiscal 2021.

Financial Aspects

Costco ended the reported quarter with cash and cash equivalents of $13,590 million and long-term debt (excluding current portion) of $7,529 million. The company’s shareholders’ equity was $14,860 million, excluding non-controlling interests of $449 million. Management incurred capital expenditures of $893 million during the first quarter. The company intends to spend approximately $3-$3.2 billion in fiscal 2021.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Costco 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 top 40% 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.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Costco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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