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How Has COST Performed 30 Days Post Earnings

Zacks Equity Research

A month has gone by since the last earnings report for Costco (COST). Shares were flat in that time frame, underperforming the S&P 500.

Will the recent trend continue leading up to its next earnings release, or is Costco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Costco Earnings Beat Estimates in Q1, Increase Y/Y

Costco Wholesale Corporation posted fourth straight quarter of positive earnings surprise, when it reported first-quarter fiscal 2020 results. However, total revenues fell short of the Zacks Consensus Estimate, after surpassing the same in the preceding quarter.

With Thanksgiving happening a week later this year compared with the prior year, total and comparable sales were adversely impacted by roughly 0.5%. Moreover, management highlighted that e-commerce sales were affected by an estimated 12 percentage points.

Nonetheless, both the top and the bottom line continued to register year-over-year improvement. The company also delivered decent comparable sales growth across all regions.

Costco’s better price management and strong membership trends have been playing a crucial role in driving comparable sales.

Q1 Earnings & Sales Picture

Excluding tax benefit related to stock-based compensation, this Issaquah, WA-based company reported adjusted earnings of $1.73 per share. The quarterly earnings not only came ahead of the Zacks Consensus Estimate of $1.70 but also improved 8% from the year-ago quarter figure.

Total revenues, which include net sales and membership fee, came in at $37,040 million, up 5.6% from the prior-year quarter’s figure. However, the figure missed the Zacks Consensus Estimate of $37,332 million.

Weakening of foreign currencies relative to the U.S. dollar adversely impacted sales by approximately 30 basis points and gasoline price deflation negatively impacted sales by approximate 40 basis.

In the reported quarter, the company’s e-commerce comparable sales rose 5.5% year over year. Excluding the effect of gasoline prices and foreign exchange, the same exhibited an improvement of 5.7% year over year.

With the prevailing trend of digital transformation in the sector, retailers are rapidly adopting the omni-channel mantra to provide a seamless shopping experience online and in stores. Costco is also following the trend. Costco operates e-commerce sites in the United States, Canada, the U.K., Mexico, Korea, Taiwan, and Japan.

Delving Deeper

Costco’s net sales grew 5.6% to $36,236 million, while membership fee increased 6.1% to $804 million. Comparable sales for the reported quarter improved 4.3%, reflecting an increase of 4.7%, 2.9% and 3.2% in the United States, Canada and Other International locations, respectively.

Excluding the impact of foreign currency fluctuations and gasoline prices, the company witnessed comparable sales growth of 5% during the quarter. Notably, the United States, Canada and Other International locations registered comparable sales growth of 5%, 5.1% and 4.5%, respectively.

Traffic or shopping frequency rose 3.4% globally and 3.1% in the United States. Average transaction improved 0.9% on a year-over-year basis.
Operating income in the quarter increased 11.8% year over year to $1,061 million, while operating margin (as a percentage of total revenues) expanded 20 bps to 2.9%.

Store Update

Costco currently operates 785 warehouses, comprising 546 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the U.K., 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, one each in Iceland, France and China.

During the quarter, the company had three new openings in the United States — business center in Dallas, Texas and two additional Costco warehouses in Connecticut and Minnesota. The company also relocated one unit in Canada. The company plans to open more or less net new 20 units in fiscal 2020.

Financial Aspects

Costco ended the reported quarter with cash and cash equivalents of $9,027 million and long-term debt (excluding current portion) of $5,107 million. The company’s shareholders’ equity was $15,861 million, excluding non-controlling interests of $363 million.

Management incurred capital expenditures of $700 million during the quarter under review, and plans to spend approximately $3 billion during the fiscal year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

At this time, Costco has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Costco has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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