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Costco's (COST) Q2 Earnings Surpass Estimates, Rise Y/Y

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After witnessing negative earnings surprise in the first quarter of fiscal 2019, Costco Wholesale Corporation (COST - Free Report) surpassed the Zacks Consensus Estimate in the second quarter. However, revenues fell short of the consensus mark, after surpassing the same in seven successive quarters.  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 on an adjusted basis. E-commerce sales during the period were also sturdy.

Certainly, strength in comparable sales, healthy membership trends, increasing penetration of e-commerce business and other growth-oriented efforts have been bolstering investors’ optimism in this Zacks Rank #3 (Hold) stock.

The company’s shares have rallied 15% in a year compared with the industry’s growth of 18%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Q2 Earnings & Sales Picture

This Issaquah, WA-based company reported quarterly earnings of $2.01 per share that came ahead of the Zacks Consensus Estimate of $1.67. The quarterly earnings improved 26.4% from the year-ago quarter’s figure of $1.59, which included tax benefit of 17 cents. Excluding the same from the prior-year figure, the quarterly earnings surged 41.5% year over year.

Total revenues, which include net sales and membership fee, came in at $35,396 million, up 7.3% from the prior-year quarter’s figure. The figure, however, marginally fell short of the consensus estimate of $35,540 million.

We noted that in the reported quarter, the company’s e-commerce comparable sales surged 20.2% year over year. Excluding the effect of gasoline prices, foreign exchange and accounting change concerning revenue recognition (ASC 606), the same exhibited a rise of 25.5% 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, which shares space with Walmart (WMT - Free Report) , Amazon (AMZN - Free Report) and Target (TGT - Free Report) , is also following the same trend.

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 7.3% to $34,628 million, while membership fee increased 7.3% to $768 million. Categories that performed well include grocery, consumer electronics, hardware, health and beauty aids, tire automotive, toys seasonal, and apparel.

Costco’s comparable sales for the reported quarter grew 5.4%, reflecting an increase of 7.4% and 0.7% in the United States and Other International locations, respectively, but witnessed a decline of 0.3% in Canada.

Excluding the impact of foreign currency fluctuations, gasoline prices and accounting change concerning revenue recognition (ASC 606), the company witnessed comparable sales growth of 6.7% during the quarter. Notably, the United States, Canada and Other International registered comparable sales growth of 7.2%, 6% and 4.8%, respectively.

Traffic or shopping frequency rose 4.9% globally and 5.2% in the United States. Average front-end transaction jumped 0.4% on a year-over-year basis. Excluding the impact of foreign exchange, inflation and revenue recognition, the company’s average ticket rose about 1.8%.

Costco’s gross margin increased 31 basis points to 11.3%. Operating income in the quarter increased 18.4% year over year to $1,203 million, while operating margin (as a percentage of total revenues) expanded 30 bps to 3.4%.

Store Update

Costco currently operates 770 warehouses, comprising 535 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 under review, the company opened one unit in Coral Springs, Florida and also relocated one unit in Miami location. The company plans to open three new units in the third quarter and 14 units, including two relocations in the final quarter.

Financial Aspects

Costco ended the reported quarter with cash and cash equivalents of $6,080 million and long-term debt (excluding current portion) of $4,794 million. The company’s shareholders’ equity was $13,858 million, excluding non-controlling interests of $325 million. During the quarter, the company bought back shares worth $117 million.

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