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Why Is Costco (COST) Down 5.7% Since the Last Earnings Report?

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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 5.7% 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 drivers.

Costco Earnings and Revenues Miss Estimates in Q2

Costco Wholesale Corporation delivered second straight quarter of negative earnings surprise as it reported second-quarter fiscal 2017. Total revenue also fell short of the Zacks Consensus Estimate for the ninth consecutive quarter. However, the company announced an increase in membership fee.

Costco posted quarterly earnings of $1.17 per share that missed the Zacks Consensus Estimate of $1.35 and declined 5.6% from the prior-year period. Total revenue, which includes net sales and membership fee, came in at $29,766 million lagging the Zacks Consensus Estimate of 29,988 million but increased 5.7% year over year.

Delving Deeper

Quarterly net sales were up 5.7% to $29,130 million, while membership fee increased 5.5% to $636 million. This Issaquah, WA based company announced that effective Jun 1, 2017, it will raise annual membership fees by $5 to $60 for the U.S. and Canada Goldstar (individual), Business, and Business add-on members (“Primary” Members). Annual fees for Executive Memberships in the U.S. and Canada will also jump to $120 from $110.

Total online sales jumped 12%, and increased 11% on a comp basis.

Costco’s comparable-store sales (comps) for the quarter improved 3%. The company witnessed comps growth of 3% and 8% across the U.S. and Canadian locations, respectively. However, comps at the Other International locations declined 2%.

Excluding the effect of gasoline prices and foreign exchange, the company witnessed comps growth of 3% during the quarter, with the U.S., Canada and Other International comps registering growth of 3%, 2% and 3%, respectively.

Comps for the four-week period ended Feb 26, 2017 increased 4%, following an increase of 7% in January, 3% in December, 1% in November, 2% in October and 1% in September.

Costco’s operating income in the quarter fell 1.4% year over year to $844 million, while operating margin (as a percentage of total revenue) contracted 20 basis points to 2.8%.

Store Update

Costco operates 728 warehouses, comprising 508 warehouses in the U.S. and Puerto Rico, 94 in Canada, 37 in Mexico, 28 in the UK, 25 in Japan, 13 in Korea, 13 in Taiwan, 8 in Australia, and 2 in Spain.

During the quarter under review, the company opened 4 new locations. In fiscal 2017, the company plans to open 29 net new locations – 14 in the U.S., 8 in Canada and one each in Japan, Korea, Taiwan, Mexico, and Australia as well as first opening in France and Iceland.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,744 million and long-term debt (including current portion) of $5,072 million. The company’s shareholders’ equity was $12,440 million, excluding non-controlling interests of $272 million. Management incurred capital expenditures of approximately $515 million during the quarter. The company anticipates capital expenditures in the range of $2.7–$2.8 billion for fiscal 2017. During the quarter, the company repurchased 411,000 shares for a total of $66 million.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend for fresh estimates. There have been eleven revisions lower for the current quarter.

VGM Scores

At this time, Costco's stock has an average Growth Score of 'C', while its Momentum is lagging a lot with 'F'. However, the stock was allocated a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'D'. 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 suitable for value and growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift.  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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