After five straight quarters of positive earnings surprises, Costco Wholesale Corporation COST succumbed to a negative earnings surprise in the first quarter of fiscal 2016. The company reported earnings of $1.09 per share that missed the Zacks Consensus Estimate of $1.17, and also declined 2.7% from $1.12 posted in the prior-year quarter due to higher operating expenses.
Delving Deeper
The warehouse retailer’s total revenue, which includes net sales and membership fee, rose 1.3% to $27,220 million in the reported quarter. Quarterly net sales went up 1.3% year over year to $26,627 million, whereas membership fee increased 1.9% to $593 million. However, total revenue fell short of the Zacks Consensus Estimate of $27,635 million, thus marking the fourth consecutive quarter of revenue miss.
Costco’s comparable-store sales (comps) for the quarter fell 1%, reflecting a 9% decline in locations at Canada and a 5% drop at other international outlets, partially offset by a 2% increase at U.S. locations. The company reported flat comps for November, after a decline of 1% in October and flat comps registered in September. While lower gasoline prices impacted U.S. comps, currency fluctuations adversely affected international comps.
Excluding the effect of lower gasoline prices and currency headwinds, the company witnessed comps growth of 6% during the quarter, with U.S., Canada and other international comps registering an increase of 6%, 9% and 7%, respectively.
Costco’s operating income in the quarter under review edged down 0.4% year over year to $767 million, whereas operating margin (as a percentage of total revenue) contracted 10 basis points to 2.8%.
Financial Aspects
Costco ended the quarter with cash and cash equivalents of $5,054 million and long-term debt (including current portion) of $6,126 million. The company’s shareholders’ equity was $10,848 million, excluding non-controlling interests of $232 million.
Let’s Conclude
Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandise it offers. Its strategy to sell products at highly discounted prices has helped in sustaining growth amid soft economic conditions. Also, the company’s diversification strategy acts as a natural hedge against risks that may arise in specific markets.
However, Costco faces stiff competition from Target Corporation TGT and Sam’s Club, a division of Wal-Mart Stores Inc. WMT that follow a similar business model which 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, going forward. Moreover, disappointing comps performance also remains a concern.
Costco currently operates 697 warehouses, comprising 487 warehouses in the U.S. and Puerto Rico, 90 in Canada, 36 in Mexico, 27 in the U.K., 24 in Japan, 12 in Korea, 11 in Taiwan, 8 in Australia, and 2 in Spain. The company plans to open 1 more warehouse before the end of the current calendar year.
Zacks Rank
Costco currently sports a Zacks Rank #2 (Buy), which is subject to change following the earnings announcement. A better-ranked stock in the retail space is Ross Stores Inc. ROST carrying a Zacks Rank #2.
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