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Costco's (COST) Q3 Earnings & Sales Beat Estimates, Up Y/Y

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After reporting a negative earnings surprise in the second quarter of fiscal 2018, Costco Wholesale Corporation (COST - Free Report) made a sharp come back delivering an earnings beat in the third quarter. Total revenue of this operator of membership warehouses also came ahead of analysts’ expectations for the fifth successive quarter. Notably, both the top and bottom lines continue to register double-digit improvement year over year, thanks to growth strategies and sturdy e-commerce sales.

This Issaquah, WA-based company reported quarterly earnings of $1.70 per share that came ahead of the Zacks Consensus Estimate by a couple of cents. Moreover, quarterly earnings improved 21.4% from $1.40 (excluding the tax benefit of 19 cents) reported in the year-ago period.

Total revenues, which include net sales and membership fee, came in at $32,361 million ahead of the consensus estimate of $31,736 million. The top line rose 12.1% during the period under review, following growth of 10.8% witnessed in the preceding quarter.

We noted that in the reported quarter, the company’s e-commerce comparable sales surged 36.8%. This signals that the company’s efforts to drive online sales bode well. With the wave of digital transformation hitting the sector, retailers are fast adopting the omni-channel mantra to provide a seamless shopping experience, whether online or in-stores. Costco, which shares pace with Walmart (WMT - Free Report) , Amazon (AMZN - Free Report) and Target (TGT - Free Report) , is no exception to this trend.

Shares of this Zacks Rank #3 (Hold) company have increased 5% compared with the industry’s growth of 0.5% in the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Costco Wholesale Corporation Price, Consensus and EPS Surprise


Costco Wholesale Corporation Price, Consensus and EPS Surprise | Costco Wholesale Corporation Quote

Delving Deeper

Net sales rose 12.1% to $31,624 million, while membership fee increased 14.4% to $737 million.

Costco’s comparable-store sales (comps) for the quarter improved 10.2%. The company witnessed comps growth of 9.7%, 11.3% and 11.8% across the United States, Canada and Other International locations, respectively. Traffic or shopping frequency rose 5.1% both globally and in the United States, while average front-end transaction jumped 4.9%. However, cannibalization hurt comps by 60 basis points.

Excluding the effect of gasoline prices and foreign exchange, the company witnessed comps growth of 7% during the quarter with the United States, Canada and Other International registering comps growth of 7.7%, 4.8% and 5.8%, respectively.

Costco’s gross margin decreased 46 basis points to 11.1%. Operating income in the quarter increased 10.2% year over year to $1,067 million, however, operating margin (as a percentage of total revenues) contracted 10 basis points to 3.3%.

Store Update

Costco operates 750 warehouses, comprising 520 warehouses in the United States and Puerto Rico, 98 in Canada, 38 in Mexico, 28 in the U.K., 26 in Japan, 14 in Korea, 13 in Taiwan, nine in Australia, two in Spain, one in Iceland and one in France. The company opened two warehouses one in Mexico and another in Korea. The company plans to open 15 units — 13 net new units and two relocations — during the fourth quarter and 25 units, including four relocations during fiscal 2018.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $5,877 million and long-term debt (excluding current portion) of $6,492 million. The company’s shareholders’ equity was $12,143 million, excluding non-controlling interests of $304 million.

Wrapping Up

We believe that Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. The company’s strategy to sell products at heavily discounted prices has helped it to remain on growth track as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. It is also gradually expanding e-commerce capabilities in the United States, Canada, the U.K., Mexico, Korea and Taiwan.

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