Earnings Preview: Costco (COST)

Costco Wholesale Corporation (COST) is scheduled to report its second-quarter 2011 financial results on March 2, 2011. The current Zacks Consensus Estimate for the quarter is 78 cents a share. For the quarter under review, revenue is $20,514 million, according to the Zacks Consensus Estimate.

First-Quarter 2011, a Synopsis

Costco Wholesale Corporation posted better-than-expected first-quarter 2011 results. The quarterly earnings of 71 cents a share topped the Zacks Consensus Estimate of 69 cents, and rose 18.3% from 60 cents earned in the prior-year quarter.

The double-digit increase in the bottom line was buoyed by growth in the top line attributable 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.

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 11.2% to $19,239 million from the prior-year quarter, and came ahead of the Zacks Consensus Estimate of $18,717 million. Net sales jumped 11.2% to $18,823 million and membership fee rose 10.3% to $416 million.

Second-Quarter 2011 Zacks Consensus

The analysts considered by Zacks, expect Costco to post second-quarter 2011 earnings of 78 cents a share. The current Zacks Consensus Estimate reflects a growth of 11.4% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between 73 cents and 81 cents.

Zacks Agreement & Magnitude

Of the 28 analysts following the stock, 6 analysts have increased their projections in the last 30 days, making no material impact on the Zacks Consensus Estimate. In the last 7 days, only one analyst revised the estimate, keeping the Zacks Consensus Estimate unchanged. None of the analysts lowered the projection in the last 7 or 30 days.

Mixed Earnings Surprise History

With respect to earnings surprises, Costco has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 1.4% to positive 2.9%. The average remained at positive 1.2%. This suggests that Costco has beaten the Zacks Consensus Estimate by an average of 1.2% in the trailing four quarters.

Costco in Neutral Lane

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it offers. The company’s strategy to sell products at heavily discounted prices has helped it to grow in 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, Costco is strongly positioned in the warehouse club industry.

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 trying economic conditions. Moreover, the company’s current cash resources are adequate to support expenditures associated with its ongoing expansion initiatives.

However, Costco faces stiff competition from BJ’s Wholesale Club Inc. (BJ) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT). These two rivals follow similar business models as they market 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 have a long-term “Neutral” rating on the stock. However, Costco holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

COSTCO WHOLE CP (COST): Free Stock Analysis Report

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