Earnings Scorecard: Costco (COST)

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted fourth-quarter 2011 results.

Street analysts have had nearly a week to ponder the news. In the subsequent paragraphs, we will cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Earnings Report Review

Costco’s quarterly earnings of $1.08 per share missed the Zacks Consensus Estimate by a penny, but rose 11.3% from 97 cents earned in the prior-year quarter.

The warehouse retailer’s total revenue, including net sales and membership fee, climbed 16.8% to $28,178 million from the prior-year quarter. Net sales jumped 16.9% to $27,588 million, whereas membership fees rose 10.7% to $590 million. The Zacks Consensus Revenue Estimate for the quarter was $27,885 million.
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.

Agreement of Estimate Revisions

Clearly, a mixed sentiment is evident among analysts, following the earnings release. In the last 7 days, 3 out of the 22 analysts covering the stock increased their estimates while 1 lowered the estimate for first-quarter 2012. For second-quarter 2012, 4 analysts revised their estimates in the upward direction, while none of the analysts chopped their estimates in the last 7 days.

For fiscal 2012, 9 analysts have increased their estimates in the last 7 days, while 5 lowered the projection. For fiscal 2013, 5 analysts revised their estimate in the upward direction, while 2 lowered the same.

Magnitude of Estimate Revisions

In the last 7 days, the Zacks Consensus Estimate for the first and second-quarter 2012 up by a penny to 80 cents and 91 cents, respectively.

For the fiscal 2012 the Zacks Consensus Estimate inched up a penny to $3.84, while it increased by 6 cents to $4.40 for FY13 in the last 7 days.

The current Zacks Consensus for first-quarter 2012 is pegged from a low of 75 cents to a high of 82 cents. For fiscal 2012, the estimates range from $3.61 to $4.05.

Our View

A differentiated product range enables Costco to provide an upscale shopping experience to its members, resulting in market share gains and higher sales per square foot. Moreover, the company continues to maintain a healthy membership renewal rate.

Costco remains committed to open new clubs in domestic and international markets. The company’s diversification strategy is a natural hedge against risks that may arise in specific markets.

Costco continues to make prudent use of its free cash flow through share repurchases and dividend payments. This underlines its efforts to maximize shareholder returns even under difficult economic conditions. Moreover, the company’s current cash resources are adequate to support expenditures associated with its ongoing expansion initiatives.

However, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, sluggishness in the housing market, and high unemployment and household debt levels, affecting their spending.

Further, 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.

Currently, we maintain our long-term Neutral rating on the stock. Furthermore, Costco maintains a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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