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Why Is Costco (COST) Down 8.6% 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 8.6% 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 its most recent earnings report in order to get a better handle on the important drivers.

Costco’s Q2 Earnings Surpass Estimates, Increase Y/Y

Costco Wholesale Corporation posted fifth straight quarter of positive earnings surprise, when it reported second-quarter fiscal 2020 results. Total revenues also surpassed the Zacks Consensus Estimate, after missing the same in the preceding quarter. Notably, both the top and the bottom line continued to register year-over-year improvement. The company also delivered decent comparable sales growth across all regions.

With Thanksgiving happening a week later this year compared with the prior year, second-quarter total and comparable sales were favorably impacted by roughly 0.5%. Moreover, management highlighted that e-commerce sales were positively impacted by an estimated 11 percentage points.

Quite apparent, Costco’s better price management and strong membership trends have been playing a crucial role in driving comparable sales.

Q2 Earnings & Sales Picture

The company reported earnings of $2.10 per share. The quarterly earnings not only came ahead of the Zacks Consensus Estimate of $2.07 but also improved 4.5% from the year-ago quarter figure.

Total revenues, which include net sales and membership fee, came in at $39,072 million, up 10.4% from the prior-year quarter. The figure also beat the Zacks Consensus Estimate of $38,366 million.

In the reported quarter, the company’s e-commerce comparable sales rose 28.4% year over year. Excluding the effect of gasoline prices and foreign exchange, the same exhibited an improvement of 28% year over year.

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 operates e-commerce sites in the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia.

Delving Deeper

Costco’s net sales grew 10.5% to $38,256 million, while membership fee increased 6.3% to $816 million. Comparable sales for the reported quarter improved 8.9%, reflecting an increase of 9.1%, 8.9% and 7.9% in the United States, Canada and Other International locations, respectively.

Excluding the impact of foreign currency fluctuations and gasoline prices, the company witnessed comparable sales growth of 7.9% during the quarter. Notably, the United States, Canada and Other International locations registered comparable sales growth of 8.1%, 6.8% and 7.1%, respectively.

Traffic or shopping frequency rose 5.9% globally and 6.1% in the United States. Average transaction improved 2.9% on a year-over-year basis.

The company witnessed comparable sales growth of 12.1% for the month of February. Further, net sales rose 13.8% year over year to $12.20 billion. E-commerce comparable sales surged 22.6% in the month under review.

Operating income in the quarter increased 5.2% year over year to $1,266 million, while operating margin (as a percentage of total revenues) shrunk 20 bps to 3.2%.

Store Update

Costco operates 786 warehouses, comprising 547 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the United Kingdom, 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, and one each in Iceland, France and China. There were no new openings during the second quarter. The company has planned two net new openings in the third quarter and 11-13 openings in the fourth quarter.

Financial Aspects

Costco ended the reported quarter with cash and cash equivalents of $7,786 million and long-term debt (excluding current portion) of $5,099 million. The company’s shareholders’ equity was $16,614 million, excluding non-controlling interests of $385 million.

Management incurred capital expenditures of $545 million during the quarter under review, and plans to spend approximately $3 billion during the fiscal year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, 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 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 these revisions looks promising. It comes with little surprise Costco has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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