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Costco's (COST) Earnings Beat Estimates in Q1, Increase Y/Y

Zacks Equity Research

Costco Wholesale Corporation COST 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. We note that shares of this Zacks Rank #3 (Hold) company have rallied 46% so far this year compared with the industry’s rise of 44%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Costco Wholesale Corporation Price, Consensus and EPS Surprise

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.

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, which shares space with Walmart WMT, Amazon AMZN and Target TGT, 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.

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