Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted third-quarter 2011 results. The quarterly earnings of 73 cents a share came fell short of the Zacks Consensus Estimate of 77 cents but rose 7.4% from 68 cents earned in the prior-year quarter.
The Zacks Consensus Estimate rose by a penny with 14 out of 25 analysts covering the stock raising their projections in the last 30 days.
The high single-digit increase in the bottom line was buoyed by double-digit growth in the top line due to improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs. The company’s international operations have been major drivers.
The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 16% to $20,623 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $20,533 million. Net sales jumped 16.1% to $20,188 million, whereas membership fee rose 10.1% to $435 million.
The sales results include contribution from the company's Mexico joint venture. Costco began incorporating results of its Mexican operations on a prospective basis since the commencement of its fiscal 2011 on August 30, 2010. The company's Mexican joint venture contributed approximately 3% increase in sales.
Costco’s comparable-store sales for the quarter rose 12%, reflecting a comparable sales growth of 10% at its U.S. locations and 18% at its international divisions. The results were favorably impacted by rising gasoline prices and a weaker U.S. dollar.
Excluding the effects of gasoline prices and a softer dollar, Costco’s comparable-store sales rose 7%, with U.S. comparable sales up 6%, while international comparable sales were up 11%.
Costco’s operating income surged 13.2% to $556 million, whereas operating margin shriveled marginally by 10 basis points to 2.7%.
The company ended the quarter with cash and cash equivalents of $4,082 million, long-term debt of $1,247 million, and shareholders’ equity of $12,541 million.
Costco currently operates 581 warehouses, including 425 in the United States and Puerto Rico, 80 in Canada, 32 in Mexico, 22 in the United Kingdom, 8 in Japan, 7 in Korea, 6 in Taiwan and 1 in Australia.
Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it offers. The company’s strategy to sell products at heavily discounted prices has helped it to grow in 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, Costco is strongly positioned in the warehouse club industry.
However, Costco faces stiff competition from BJ’s Wholesale Club Inc. (BJ) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT). These two rivals follow similar business models as they market 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.
Currently, we have a long-term ‘Neutral’ rating on the stock. However, Costco holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
BJ’S WHOLESALE (BJ): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis Report
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