Earnings Preview: Costco Wholesale (COST)

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, is slated to report its fourth-quarter 2011 financial results on October 5, 2011. The current Zacks Consensus Estimate for the quarter is $1.09 a share. For the quarter to be reported, the Zacks Consensus Estimate for revenue is $27,886 million.

Third-Quarter 2011, a Synopsis

Costco Wholesale Corporation posted third-quarter 2011 earnings of 73 cents per share that fell short of the Zacks Consensus Estimate of 77 cents but rose 7.4% from 68 cents earned in the prior-year quarter.

The high single-digit 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.

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 16% to $20,623 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $20,533 million. Net sales jumped 16.1% to $20,188 million, whereas membership fee rose 10.1% to $435 million.

Fourth-Quarter 2011 Zacks Consensus

Analysts considered by Zacks expect Costco to post fourth-quarter 2011 earnings of $1.09 a share. The current Zacks Consensus Estimate reflects a growth of 12.4% from the prior-year quarter’s earnings. The current Zacks Consensus Estimates for the quarter ranges between $1.02 and $1.13 per share.

Zacks Agreement & Magnitude

The current Zacks Consensus Estimate remained stable over the last 30 days despite 2 out of 23 analysts covering the stock revising the estimate downwards. In the last 7 days, none of the analysts have revisited their estimates.

Positive 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 negative 2.1%. This suggests that Costco has outperformed the Zacks Consensus Estimate by an average of 2.1% in the last four quarters.

Our View

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it has to offer. The company’s strategy to sell products at heavily discounted prices has helped it to remain on a positive growth track amid beleaguered economic conditions as cash-strapped customers continue to see it as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is well positioned in the warehouse club industry.

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

Further, Costco continues to make prudent use of its free cash flows 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. 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.

Moreover, the company’s customers are 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, which may affect their spending.

Costco currently operates 592 warehouses, which include 429 in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 9 in Japan, 7 in Korea, 8 in Taiwan and 3 in Australia.

Given the pros and cons we maintain our long-term Neutral recommendation on the stock. Moreover, Costco holds a Zacks #3 Rank, which translates into a short-term Hold rating.

Wal-Mart Stores (WMT): Free Stock Analysis Report

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