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Costco (COST) Q3 Earnings Miss Estimates, Revenues Up Y/Y

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After delivering five straight quarters of positive earnings surprise, Costco Wholesale Corporation (COST - Free Report) reported a miss in third-quarter fiscal 2020 results. Total revenues also lagged the Zacks Consensus Estimate, after surpassing the same in the preceding quarter. However, the top line improved year over year and the company logged a decent comparable sales growth.

This Issaquah, WA-based company’s overall sales increased in the month of March, as consumers stocked up food and essentials items in the wake of the pandemic. However, sales in the month of April dropped as stay-at-home orders, social distancing and some mandatory closures resulted in lower traffic and soft sales at warehouses. Nonetheless, the company’s e-commerce sales showcased a sharp rise in both March and April months.

Yet we note that Costco’s bottom line came under pressure. Management highlighted that incremental wage and sanitation costs owing to the coronavirus outbreak hurt the company’s quarterly earnings.

Consequently, shares of this Zacks Rank #3 (Hold) company fell about 2.2% during the after-market trading session on May 28. We note that the stock has gained 4.1% in the past six months against the industry’s decline of 0.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Q3 Earnings & Sales Picture

Costco reported third-quarter earnings of $1.89 per share that fell short of the Zacks Consensus Estimate of $1.92. We note that the company had reported earnings of $2.05 per share — including the benefit of a non-recurring tax item of 16 cents per share — in the year-ago period. Excluding the same, prior-year earnings came in at $1.89 per share.

The operator of membership warehouses stated that the third-quarter bottom line was adversely impacted by additional COVID-19 related costs of $283 million pretax (or 47 cents a share). Management anticipates incremental expenses related to this biological catastrophe to exceed $100 million in the fourth quarter.

Total revenues, which include net sales and membership fee, came in at $37,266 million, up 7.3% from the prior-year quarter. However, the figure missed the Zacks Consensus Estimate of $37,530.7 million. Net sales declined 1.8% during the month of April, following a rise of 11.7% in March.

In the reported quarter, the company’s e-commerce comparable sales rose 64.5% year over year. Excluding the effect of gasoline prices and foreign exchange, the same exhibited an improvement of 66.1% year over year. We note that e-commerce comparable sales soared 85.7% during the month of April. This follows an increase of 48.3% in the month of March.

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 trend. 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 7.3% to $36,451 million, while membership fee increased 5% to $815 million. Comparable sales for the reported quarter improved 4.8%, reflecting an increase of 5.9% and 6.2% in the United States and Other International locations, respectively, partly offset by 2.5% decline in Canada.

Excluding the impact of foreign currency fluctuations and gasoline prices, the company witnessed comparable sales growth of 7.8% during the quarter. Notably, the United States, Canada and Other International locations registered comparable sales growth of 8%, 3% and 12.2%, respectively.

We note that shopping frequency fell 4.1% globally and 2% in the United States. However, average transaction improved 9.3% on a year-over-year basis.

Operating income in the quarter increased 5.1% year over year to $1,179 million, while operating margin (as a percentage of total revenues) remained flat at 3.2%.

Store Update

Costco currently operates 787 warehouses, comprising 547 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the U.K., 26 in Japan, 16 in Korea, 13 in Taiwan, 12 in Australia, two in Spain, one each in Iceland, France and China. There were two new openings during the quarter under review. During the final quarter of fiscal 2020, the company plans to open 10 units, including two relocations. Management expects to open net 13 units during the fiscal year.

Financial Aspects

Costco ended the reported quarter with cash and cash equivalents of $10,826 million and long-term debt (excluding current portion) of $7,598 million. The company’s shareholders’ equity was $16,802 million, excluding non-controlling interests of $401 million. Further, in order to improve financial flexibility, the company completed a $4 billion debt offering on Apr 20.

Management incurred capital expenditures of $626 million during the quarter under review, and plans to spend approximately $2.7-$2.9 billion during the fiscal year.

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