Investors want their portfolio to have stocks with a track record of earnings beat, surging share price and a favorable recommendation. Costco Wholesale Corporation COST used to be one such stock. However, of late, investors have adopted a cautious stance. So what suddenly went wrong with this Issaquah, WA-based company? Let’s find out.
After five straight quarters of positive earnings surprises, Costco 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 by 6.8%, and decreased 2.7% from $1.12 earned in the prior-year quarter. The year-over-year decline was owing to higher operating expenses.
Investors are also concerned about Costco’s disappointing comparable-store sales (comps) performance. During the first quarter, comps 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. While lower gasoline prices impacted U.S. comps, currency fluctuations adversely affected international comps. On the sales front, this was the fourth consecutive quarter in which the company missed the Zacks Consensus Estimate.
Nevertheless, excluding the effect of lower gasoline prices and currency headwinds, Costco recorded comps growth of 6% during the quarter, with U.S., Canada and other international comps registering an increase of 6%, 9% and 7%, respectively.
We believe that Costco continues to be a dominant retail wholesaler based on its breadth and quality of merchandise offered. A differentiated product range enables the company to provide an upscale shopping experience to its members. The company is also gradually expanding its E-commerce capabilities in the U.S., Canada, U.K., Mexico and Korea. E-commerce sales increased approximately 15% on a comps basis during the first quarter of fiscal 2016.
Given the pros and cons embedded in the stock, Costco currently carries a Zacks Rank #3 (Hold).
Favorably Ranked Stocks
Investors interested in the retail space may consider better-ranked stocks such as Ross Stores Inc. ROST, J. C. Penney Company, Inc. JCP and Foot Locker, Inc. FL, all carrying a Zacks Rank #2 (Buy).
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