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Will Costco's (COST) Positive Comps Reverse Earnings Miss?

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Having delivered comparable-store sales growth consistently, Costco Wholesale Corporation (COST - Free Report) is well positioned in the warehouse club industry. The company has unswervingly registered comparable-store sales growth from January to June.

Within this period, comps growth touched a low of 2% and hit a high of 6%, thereby recording an average growth of approximately 4.7%. In the first six months of 2014, comps increased 4% in January, 2% in February, 5% in March and April, and 6% in May and June each.

Costco continues to be a dominant retail wholesaler based on the range and quality of merchandise it offers. The company’s strategy of selling products at heavily discounted prices has helped it to sustain growth as budget-conscious customers continue to see it as a viable option for low-cost necessities.

We believe that Costco’s differentiated product range enables it to provide an upscale shopping experience to its members, resulting in market share gains and higher sales per square foot. Moreover, it continues to maintain a healthy membership renewal rate. The company is also gradually expanding its e-commerce capabilities in the U.S., Canada, U.K. and Mexico.

Now the question is whether Costco’s positive comps can reverse its earnings miss story. Costco delivered negative earnings surprises when compared with the Zacks Consensus Estimate in the last 4 quarters. Starting fourth quarter fiscal 2013 through third quarter fiscal 2014, the company delivered negative earnings surprises of 4.1%, 5.9%, 10.3% and 1.8%, respectively.

Moreover, 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.

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.

Currently, Costco carries a Zacks Rank #3 (Hold).

Other Stocks Worth Considering

A better-ranked stock worth considering in the retail sector is Big Lots Inc. (BIG - Free Report) , which carries a Zacks Rank #2 (Buy).


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