Earnings Preview: Costco

Costco Wholesale Corporation (COST) is scheduled to report its third-quarter 2011 financial results on May 25, 2011. The current Zacks Consensus Estimate for the quarter is 77 cents a share. For the quarter under review, revenue is $20,533 million, according to the Zacks Consensus Estimate.

Second-Quarter 2011, a Synopsis

Costco Wholesale Corporation had posted better-than-expected second-quarter 2011 results. The quarterly earnings of 79 cents a share came a penny ahead of the Zacks Consensus Estimate, and rose 12.9% from 70 cents earned in the prior-year quarter.

The double-digit increase in the bottom line was backed 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 major drivers.

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 11.4% to $20,875 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $20,545 million. Net sales jumped 11.4% to $20,449 million, whereas membership fee rose 10.4% to $426 million.

Third-Quarter 2011 Zacks Consensus

The analysts considered by Zacks, expect Costco to post third-quarter 2011 earnings of 77 cents a share. The current Zacks Consensus Estimate reflects a growth of 13.2% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between 73 cents and 79 cents.

Zacks Agreement & Magnitude

Of the 25 analysts following the stock, 12 have raised their projections in the last 30 days, which resulted in a penny’s increase in the Zacks Consensus Estimate to 77 cents. In the last 7 days, only one analyst revised the estimate, keeping the Zacks Consensus Estimate unchanged. None of the analysts have lowered their projections in the last 7 or 30 days.

Mixed Earnings Surprise History

With respect to earnings surprises, Costco has met as well as topped the Zacks Consensus Estimate over the last four quarters in the range of 0.0% to 2.9%. The average remained at positive 2.1%. This suggests that Costco has beaten the Zacks Consensus Estimate by an average of 2.1% 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. Moreover, Costco holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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