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Why Is Costco (COST) Down 0.7% Since Last Earnings Report?

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A month has gone by since the last earnings report for Costco (COST - Free Report) . Shares have lost about 0.7% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Costco Q4 Earnings & Sales Beat Estimates, Up Y/Y

Costco posted better-than-expected earnings and revenues in the fourth quarter of fiscal 2018. While this marks the company’s second straight bottom-line beat, revenues surpassed estimates for the sixth consecutive period. Notably, the top and the bottom line continued to register year over year improvement. The company also delivered comparable store sales (comps) growth across all regions. E-commerce sales during the period were also sturdy

Q4 Earnings & Sales Picture

This Issaquah, WA-based company reported quarterly earnings of $2.36 per share that beat the Zacks Consensus Estimate by 2 cents. Moreover, quarterly earnings improved 13.5% from year-ago quarter’s figure of $2.08.

Total revenues, which include net sales and membership fee, came in at $44,414 million. The figure surpassed the consensus estimate of $44,053 million. The top line rose almost 5% from the prior-year quarter’s tally.

We noted that in the reported quarter, the company’s e-commerce comparable sales surged 26.2% year over year. Excluding the effect of gasoline prices and foreign exchange, the same depicted a rise of 26.3% year over year. This indicates that the company’s efforts to drive online sales bode well. With the prevailing trend of digital transformation in the sector, retailers are rapidly adopting the omni-channel mantra to provide a seamless shopping experience online and in stores.

Delving Deeper

Net sales rose close to 5% to $43,414 million, while membership fee increased 5.7% to $997 million.

Costco’s comparable-store sales (comps) for the quarter improved 9.5% year over year. The company witnessed comps growth of 10.8%, 5.7% and 6.7% across the United States, Canada and Other International locations, respectively. Traffic or shopping frequency rose 4.9%, globally and in the United States. Average front-end transaction jumped 4.4% on a year-over-year basis. Excluding the impacts of foreign exchange and inflation, the company’s average ticket inched up more than 2%. However, cannibalization hurt comps by 55 basis points (bps). Further, we note that weakening U.S dollar dented sales by approximately 25 bps.

Excluding the effect of gasoline prices and foreign exchange, the company witnessed comps growth of 7.2% during the quarter with the United States, Canada and Other International registering comps growth of 7.8%, 4.6% and 6.9%, respectively.

Costco’s gross margin fell 35 basis points to 10.9%. Operating income in the quarter inched down close to 0.3% year over year to $1,446 million. However, operating margin (as a percentage of total revenues) contracted nearly 10 bps to 3.3%.

Store Update

At the end of the fourth quarter and fiscal 2018, Costco operated 762 warehouses, comprising 527 warehouses in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 28 in the U.K., 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, two in Spain, one in Iceland and one in France. In fiscal 2019, the company plans to open more than 20 new warehouses. Majority of these openings will be carried out in the United states. The company also plans to relocate 4 units to improved locations.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $6,055 million and long-term debt (excluding current portion) of $6,487 million. The company’s shareholders’ equity was $12,799 million, excluding non-controlling interests of $304 million.

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 strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision 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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