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Here's Why Costco (COST) Q1 Earnings Are Likely to Improve

Zacks Equity Research

Costco Wholesale Corporation COST is slated to report first-quarter fiscal 2020 results on Dec 12. In the trailing four quarters, this Issaquah, WA-based company’s bottom line has outperformed the Zacks Consensus Estimate by 7.2%, on average. In the last reported quarter, the company registered a positive earnings surprise of 5.9%.

The Zacks Consensus Estimate for first-quarter earnings is currently pegged at $1.70, which indicates an improvement of 5.6% from the year-ago quarter’s reported figure. The consensus mark has moved down by a penny in the past seven days.

Factors Influencing Costco’s Performance

Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. In fact, the company’s strategy to sell differentiated product range at heavily discounted prices has been resulting in market share gains and higher sales per square foot. We believe that the company’s growth strategies, better price management, decent comparable sales (comps) performance and strong membership trends have been driving the top line.

For the 12-week first-quarter fiscal 2020 ended Nov 24, Costco generated net sales of $36.24 billion, reflecting an increase of 5.6% from $34.31 billion reported in the year-ago period. Comps for the period improved 4.3%, while the same increased 4.7%, 2.9% and 3.2% in the United States, Canada and Other International locations, respectively.

Costco has been also steadily expanding e-commerce capabilities in the United States, Canada, the U.K., Mexico, Korea and Taiwan. However, e-commerce comps fell 3.6%, following an increase of 16.5% and 17.8% in October and September, respectively. Nonetheless, the metric improved 5.5% during the 12-week first-quarter fiscal 2020 ended Nov 24.

Management highlighted that e-commerce sales during the month of November were adversely impacted by an estimated 20 percentage points. This can be attributed to Thanksgiving/Black Friday/Cyber Monday occurred a week later this year compared with the prior year. Again, website performance issues witnessed on Costco’s U.S. and Canadian e-commerce websites on Thanksgiving Day and Black Friday also negatively impacted sales. Total and comparable sales were impacted by roughly one and one-half percent.

Further, analysts pointed that any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses might also compress margins. Also, increasing competition on attributes such as price, products and speed to market cannot be ignored.

Costco Wholesale Corporation Price, Consensus and EPS Surprise


Costco Wholesale Corporation Price, Consensus and EPS Surprise

Costco Wholesale Corporation price-consensus-eps-surprise-chart | Costco Wholesale Corporation Quote

What the Zacks Model Unveils

Our proven model does not conclusively predict an earnings beat for Costco this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Costco carries a Zacks Rank #3 but has an Earnings ESP of -2.02%.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

lululemon athletica LULU has an Earnings ESP of +1.32% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

General Mills GIS has an Earnings ESP of +1.58% and a Zacks Rank #3.

AutoZone AZO has an Earnings ESP of +0.80% and a Zacks Rank #3.

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