Costco Wholesale Corporation COST delivered second straight quarter of negative earnings surprise as it reported second-quarter fiscal 2017. Total revenue also fell short of the Zacks Consensus Estimate for the ninth consecutive quarter. As a result, shares of this warehouse club operator fell over 4% during after-market trading hours yesterday. Even the announcement of increase in membership fee failed to instill confidence in investors.
Costco posted quarterly earnings of $1.17 per share that missed the Zacks Consensus Estimate of $1.35 and declined 5.6% from the prior-year period. Total revenue, which includes net sales and membership fee, came in at $29,766 million lagging the Zacks Consensus Estimate of 29,988 million but increased 5.7% year over year.
Quarterly net sales were up 5.7% to $29,130 million, while membership fee increased 5.5% to $636 million. This Issaquah, WA based company announced that effective Jun 1, 2017, it will raise annual membership fees by $5 to $60 for the U.S. and Canada Goldstar (individual), Business, and Business add-on members (“Primary” Members). Annual fees for Executive Memberships in the U.S. and Canada will also jump to $120 from $110.
Costco’s comparable-store sales (comps) for the quarter improved 3%. The company witnessed comps growth of 3% and 8% across the U.S. and Canadian locations, respectively. However, comps at the Other International locations declined 2%.
Excluding the effect of gasoline prices and foreign exchange, the company witnessed comps growth of 3% during the quarter, with the U.S., Canada and Other International comps registering growth of 3%, 2% and 3%, respectively.
Comps for the four-week period ended Feb 26, 2017 increased 4%, following an increase of 7% in January, 3% in December, 1% in November, 2% in October and 1% in September. The trend is reflected from the stock’s performance in the past six month. In the said time frame, the stock has advanced 12.3% and comfortably outperformed the Zacks categorized Retail-Discount & Variety industry that inched up 1%.
Costco’s operating income in the quarter fell 1.4% year over year to $844 million, while operating margin (as a percentage of total revenue) contracted 20 basis points to 2.8%.
Costco operates 728 warehouses, comprising 508 warehouses in the U.S. and Puerto Rico, 94 in Canada, 37 in Mexico, 28 in the UK, 25 in Japan, 13 in Korea, 13 in Taiwan, 8 in Australia, and 2 in Spain.
Costco ended the quarter with cash and cash equivalents of $4,744 million and long-term debt (including current portion) of $5,072 million. The company’s shareholders’ equity was $12,440 million, excluding non-controlling interests of $272 million.
Costco continues to be one of the dominant retail wholesalers based on breadth and quality of merchandise offered. A differentiated product range enables the company to ensure an upscale shopping experience for its members, resulting in market share gains. Moreover, Costco continues to maintain a healthy membership renewal rate. It is also gradually expanding its eCommerce capabilities in the U.S., Canada, the UK, Mexico, Korea and Taiwan.
However, Costco faces stiff competition from Sam’s Club, a division of Wal-Mart Stores Inc. WMT which follows a similar business model, pushing through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid competitive pressure may dampen sales and margins.
Zacks Rank & Key Picks
Costco currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail space are The Children’s Place, Inc. PLCE flaunting a Zacks Rank #1 (Strong Buy) and Burlington Stores, Inc. BURL carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here .
Children’s Place delivered an average positive earnings surprise of 36.3% in the trailing four quarters and has a long-term earnings growth rate of 10.3%.
Burlington Stores delivered an average positive earnings surprise of 25.6% in the trailing four quarters and has a long-term earnings growth rate of 19.9%.
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Costco (COST) Earnings and Revenues Miss Estimates in Q2 – Nasdaq