Costco Wholesale Corporation (COST) recently posted better-than-expected second-quarter 2012 results. The quarterly earnings of 90 cents a share came ahead of the Zacks Consensus Estimate of 88 cents, and rose 13.9% from 79 cents earned in the prior-year quarter.
The 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 the major driver.
Let’s Dig Deep
The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 10% to $22,967 million from the prior-year quarter, and surpassed the Zacks Consensus Estimate of $22,737 million. Net sales jumped 10.1% to $22,508 million, whereas membership fee rose 7.7% to $459 million.
Costco’s comparable-store sales for the quarter rose 8%, reflecting a comparable sales increase of 8% both at its U.S. locations and international divisions. The results were favorably impacted by rising gasoline prices but adversely affected by foreign currencies fluctuation.
Excluding the effects of gasoline prices and foreign currencies, Costco’s comparable-store sales rose 7%, with U.S. comparable sales up 7%, while international comparable sales were up 10%.
Costco’s operating income increased 8.1% to $644 million; however, operating margin (as a percentage of total revenue) shriveled marginally by 10 basis points to 2.8%.
February Sales
Costco has been able to maintain its sales momentum. After an 8% increase in January 2012, Costco’s comparable-store sales for the month of February climbed by an equal percentage, reflecting comparable sales growth of 8% both at its U.S. locations and international divisions.
Excluding the effects of higher gasoline prices and foreign currencies fluctuation, Costco’s comparable-store sales for February climbed 7%, with U.S. and international comparable sales increasing 7% and 9%, respectively.
Financial Aspects
Costco ended the quarter with cash and cash equivalents of $4,389 million, long-term debt of $2,280 million, and shareholders’ equity of $12,819 million.
Let’s Conclude
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 sustain growth 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 Target Corporation (TGT) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT), 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.
Based on the pulse of the economy, we believe that budget-constrained consumers will remain watchful on their spending and look for discounts. Consequently, we could see competitive pricing, compelling products and innovative ways to attract shoppers.
Given the pros and cons 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, and correlates with our long-term view.
Costco currently operates 600 warehouses, including 433 in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, 8 in Taiwan, 7 in Korea, and 3 in Australia.
COSTCO WHOLE CP (COST): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment