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Costco Wholesale Corporation (COST - Free Report) reported better-than-expected first-quarter fiscal 2013 results today. The quarterly earnings of 95 cents a share beat the Zacks Consensus Estimate by a couple of cents, and surged 18.8% from 80 cents earned in the prior-year period.

The boost in the bottom line was buoyed by growth in the top line due to rise in membership fees and improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs.

Let’s Unveil

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 9.6% to $23,715 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $23,761 million. Net sales jumped 9.6% to $23,204 million, whereas membership fee rose 14.3% to $511 million.

Costco’s comparable-store sales for the quarter ascended 7% buoyed by a 7% and 9% jump in comparable-store sales in the U.S. and international locations, respectively. The results were favorably impacted by inflation in gasoline prices and foreign currencies fluctuation. In the prior-year quarter, the company delivered comparable-store sales growth of 10%.

Excluding the effects of gasoline prices and foreign currencies, the company witnessed comparable-store sales growth of 6%, with U.S. sales increasing by a similar rate and international sales rising 7%.

Recently, Costco came out with comparable-store sales data for the month of November. After an increase of 7% in October, the company’s comparable-store sales for November climbed 6%, reflecting comparable sales growth of an equivalent percentage at its U.S. locations and 7% at international outlets. In the prior-year period, the company delivered comparable-store sales growth of 9%.

Costco’s operating income surged 17.7% to $639 million, whereas, operating margin (as a percentage of total revenue) expanded marginally by 20 basis points to 2.7%.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $3,897 million, long-term debt of $1,366 million, and shareholders’ equity of $12,665 million, excluding non-controlling interests of $167 million.

Let’s Conclude

Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandises it offers. The company’s strategy to sell products at heavily discounted prices has helped it sustain growth amidst beleaguered economic conditions, as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, the company is well positioned in the warehouse club industry. The company’s diversification strategy is a natural hedge against risks that may arise in specific markets.

However, Costco faces stiff competition from Target Corporation (TGT - Free Report) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT - Free Report) , which follows a similar business model that pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition may depress sales and margins.

Costco expects to open 1 new warehouse before December 31, 2012. It currently operates 621 warehouses, comprising 448 warehouses in the United States and Puerto Rico, 85 in Canada, 32 in Mexico, 23 in the United Kingdom, 13 in Japan, 9 in Taiwan, 8 in Korea and 3 in Australia.

Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful of their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers during this holiday season. Currently, we maintain our long-term “Neutral” recommendation on the stock. Moreover, Costco holds a Zacks #3 Rank that translates into a short-term “Hold” rating.

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