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Why Is Costco (COST) Up 2.8% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Costco (COST). Shares have added about 2.8% in that time frame, underperforming the S&P 500.

Will the recent positive 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’s Q4 Earnings Surpass Estimates, Rise Y/Y

Costco Wholesale Corporation posted third straight quarter of positive earnings surprise, when it reported fourth-quarter fiscal 2019 results. Total revenue also came ahead of the Zacks Consensus Estimate, after missing the same in the preceding two quarters. Notably, both the top and bottom line continued to register year-over-year improvement. The company also delivered comparable sales growth across all regions and sturdy e-commerce sales.

However, comparable sales fell short of analysts’ expectations. Notably, Costco has to cope with stiff competition and aggressive pricing strategy undertaken by other industry bellwethers.

Nonetheless, decent comparable sales performance, healthy membership trends, increasing penetration of e-commerce business and other growth-oriented efforts have been bolstering investors’ optimism in the stock.

Q4 Earnings & Sales Picture

Excluding charge related to product tax assessment, this Issaquah, WA-based company reported adjusted earnings of $2.69 per share. The quarterly earnings not only came ahead of the Zacks Consensus Estimate of $2.54 but also improved 14% from the year-ago quarter’s figure of $2.36.

Total revenues, which include net sales and membership fee, came in at $47,498 million, up 7% from the prior-year quarter’s figure. The figure also beat the Zacks Consensus Estimate of $47,122 million.

In the reported quarter, the company’s e-commerce comparable sales surged 19.8% year over year. Excluding the effect of gasoline prices, foreign exchange and accounting change concerning revenue recognition (ASC 606), the same exhibited an improvement of 21.9% year over year. This reflects the company’s efforts to drive online sales.

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.

Delving Deeper

Net sales rose 7% to $46,448 million, while membership fee increased 5.3% to $1,050 million.

Costco’s comparable sales for the reported quarter grew 5.1%, reflecting an increase of 6.2%, 2.6% and 1.9% in the United States, Canada and Other International locations, respectively.

Excluding the impact of foreign currency fluctuations, gasoline prices and accounting change concerning revenue recognition (ASC 606), the company witnessed comparable sales growth of 5.1% during the quarter. Notably, the United States, Canada and Other International locations registered comparable sales growth of 5.2%, 4.7% and 5%, respectively.

Traffic or shopping frequency rose 3.7% globally and 3.6% in the United States. Average transaction improved 1.4% on a year-over-year basis.

Operating income in the quarter increased 1.2% year over year to $1,463 million, while operating margin (as a percentage of total revenues) contracted 20 bps to 3.1%. Excluding one-time items, adjusted operating income rose 9.7%.

Store Update

Costco currently operates 783 warehouses, comprising 544 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 under review, the company opened eight new warehouses in the United States, one in the U.K. and first warehouse in Shanghai, China. During fiscal 2019, the company opened 25 total locations, including five relocations.

Financial Aspects

Costco ended the reported quarter with cash and cash equivalents of $8,384 million and long-term debt (excluding current portion) of $5,124 million. The company’s shareholders’ equity was $15,243 million, excluding non-controlling interests of $341 million. During the quarter, the company bought back shares worth $52 million.

Management incurred capital expenditures of approximately $3 billion during the fiscal year, and expects the same to be equivalent or marginally up in fiscal 2020.

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, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, 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 B. 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 this revision has been net zero. 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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