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Earnings Preview: Costco

Zacks Equity Research

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators and an S&P 500 company, is slated to report its first-quarter fiscal 2013 financial results on Wednesday, December 12.

The current Zacks Consensus Estimate for the quarter is 93 cents a share that reflects growth of 16.5% from the prior-year quarter earnings. The estimates in the current Zacks Consensus range between a low of 90 cents and a high of 98 cents a share. The Zacks Consensus revenue estimate is pegged at $23,743 million for the quarter under discussion.

Recap of Fourth-Quarter 2012

Costco’s fourth-quarter 2012 earnings of $1.39 per share beat the Zacks Consensus Estimate of $1.30, and surged 28.7% from $1.08 earned in the prior-year period.

The bottom-line was buoyed by double-digit growth in the top line due to a rise in membership fees and improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs.

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 14.3% to $32,218 million from the prior-year quarter, and surpassed the Zacks Consensus Estimate of $31,902 million. Net sales jumped 14.3% to $31,524 million, whereas membership fee rose 17.6% to $694 million. eCommerce sales, including Costco.com and Costco.ca, surged 14%. Costco’s comparable-store sales for the quarter ascended 5%.

Zacks Agreement & Magnitude

The Zacks Consensus Estimate for the first quarter hasn’t shown any movement in the last 7 and 30 days, despite upward revision in estimates made by 1 and 4 of 18 covering analysts, respectively.

Analysts raising their estimates are counting upon better-than-expected November comparable-sales results and effective cost management, and anticipate Costco to undertake rapid club expansion plans. Costco’s comparable-store sales for November climbed 6%.

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 6.9%. The average remained at 4.6%, suggesting that Costco has outperformed the Zacks Consensus Estimate by the same magnitude in the trailing four quarters.

Closing Comment

Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandises it offers. The company’s strategy to sell products at heavily discounted prices has helped it sustain growth amidst 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 well positioned in the warehouse club industry.

However, Costco faces stiff competition from Target Corporation (TGT) and Sam’s Club, a division of  Wal-Mart Stores Inc. (WMT), which follows a similar business model that pushes through 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.      

Costco currently holds a Zacks #3 Rank that translates into a short-term “Hold” rating. At present, we maintain our long-term “Neutral” recommendation on the stock.

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