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Costco (COST) Down 7.1% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Costco (COST - Free Report) . Shares have lost about 7.1% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Costco’s Q1 Earnings Miss Estimates, Sales Surpass

After two straight quarters of positive earnings surprises, Costco Wholesale Corporation missed the Zacks Consensus Estimate in the first quarter of fiscal 2019. However, revenues surpassed estimates for the seventh successive quarter.  Notably, the top and the bottom lines 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.

Dismal margins in the reported quarter as well as earnings miss are concerns. Nevertheless, strength in comparable sales, healthy membership trends, increasing penetration of e-commerce business and other growth-oriented efforts have been boosting investors’ optimism.

Q1 Earnings & Sales Picture

This Issaquah, WA-based company reported adjusted quarterly earnings of $1.61 per share that fell short of the Zacks Consensus Estimate by a penny. However, adjusted earnings improved 18.4% from the year-ago quarter’s figure of $1.36.

Total revenues, which include net sales and membership fee, came in at $35,069 million, up 10.2% from the prior-year quarter’s figure. The figure surpassed the consensus estimate of $34,628 million.

We noted that in the reported quarter, the company’s e-commerce comparable sales surged 32.3% year over year. Excluding the effect of gasoline prices, foreign exchange and accounting change concerning revenue recognition (ASC 606), the same depicted a rise of 26.2% year over year. This reflects the company’s efforts to drive online sales.

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. Costco is also following the same trend.

Delving Deeper

Net sales rose close to 10.3% to $34,311 million, while membership fee increased 9.5% to $758 million. Categories that performed well include grocery, consumer electronics, hardware, health and beauty aids and automotive.

Costco’s comparable sales for the quarter grew 8.8%, while the same increased 11%, 2.4% and 4% in United States, Canada and Other International locations, respectively.

Excluding the impact of foreign currency fluctuations, gasoline prices and accounting change concerning revenue recognition (ASC 606), the company witnessed comparable sales growth of 7.5% during the quarter. Notably, the United States, Canada and Other International registered comparable sales growth of 8.3%, 5.5% and 5.8%, respectively.

Traffic or shopping frequency rose 4.9% globally and 5.2% in the United States. Average front-end transaction jumped 3.7% on a year-over-year basis. Excluding the impact of foreign exchange and inflation, the company’s average ticket rose about 2.4%.

Costco’s gross margin fell 50 basis points to 10.8%. Operating income in the quarter edged down 0.2% year over year to $949 million, while operating margin (as a percentage of total revenues) contracted nearly 30 bps to 2.7%.

Store Update

Costco currently operates 768 warehouses, comprising 533 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, two in Spain, one in Iceland and one in France.

During the quarter, the company opened eight warehouses, including two relocations. In fiscal 2019, the company plans to open about 23 net new warehouses. The majority of these openings will be carried out in the United States. The company also plans to relocate four units.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $6,778 million and long-term debt (excluding current portion) of $6,480 million. The company’s shareholders’ equity was $13,167 million, excluding non-controlling interests of $312 million. During the quarter, the company bought back shares worth $34.5 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Costco has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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