Costco Wholesale Corporation (COST) came out with its third-quarter fiscal 2014 results today. The quarterly earnings of $1.07 per share missed the Zacks Consensus Estimate by a couple of cents but rose 2.9% from $1.04 earned in the prior-year period, aided by impressive comparable-store sales performance in the U.S.
Let’s Unveil Further
The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 7.1% to $25,794 million from the prior-year quarter, and came ahead of the Zacks Consensus Estimate of $25,712 million. Moreover, the top-line growth rate accelerated to 7.1% in the reported quarter from 5.8% in second-quarter of fiscal 2014. Quarterly net sales rose 7.1% to $25,233 million, whereas membership fee increased 5.6% to $561 million.
Costco’s comparable-store sales for the quarter increased 4% buoyed by a 5% rise in comparable-store sales in the U.S. locations and a 3% jump in the international locations. In the year-ago quarter, the company delivered comparable-store sales growth of 5%.
Excluding the effect of lower gasoline prices and foreign currencies, the company witnessed comparable-store sales growth of 6%, with U.S. and international comps increasing by 6% and 8%, respectively.
Costco’s operating income rose 2.1% year over year to $737 million. However, operating margin (as a percentage of total revenue) contracted 10 basis points to 2.9%.
Financial Aspects
Costco ended the quarter with cash and cash equivalents of $5,736 million, long-term debt of $4,985 million, and shareholders’ equity of $11,819 million, excluding non-controlling interests of $202 million.
Let’s Conclude
Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandise it offers. The company’s strategy to sell products at highly discounted prices has helped it sustain growth amid 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, the company is well positioned in the warehouse club industry. The company’s diversification strategy is 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), 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.
Costco currently operates 655 warehouses, comprising 464 warehouses in the United States and Puerto Rico, 87 in Canada, 33 in Mexico, 25 in the United Kingdom, 19 in Japan, 10 in Taiwan, 10 in Korea, 6 in Australia, and 1 in Spain. Further, the company plans to open eight more warehouses before the end of fiscal 2014.
Going by 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 more competitive pricing, compelling products and innovative ways to attract shoppers. Currently, Costco has a Zacks Rank #3 (Hold). The other better ranked stock worth considering in the retail sector is The Kroger Co. (KR) that carries a Zacks Rank #2 (Buy).
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