Costco's (COST) Q2 Earnings Miss Estimates, Improves Y/Y

After delivering three straight quarters of positive earnings surprises, Costco Wholesale Corporation (NASDAQ:COST) missed on earnings in the second quarter of fiscal 2018. However, total revenue of this operator of membership warehouses came ahead of analysts’ expectations for the fourth successive quarter. Notably, both the top and bottom lines continue to register double-digit growth year over year, thanks to growth strategies and sturdy e-commerce sales.

This Issaquah, WA-based company reported adjusted quarterly earnings of $1.42 per share — excluding the tax benefit of 17 cents — that fell short of the Zacks Consensus Estimate of $1.45. However, quarterly earnings improved 21.4%, following an increase of 16.2% in the preceding quarter.

Total revenues, which include net sales and membership fee, came in at $32,995 million ahead of the consensus estimate of 32,715.2 million. The top line rose 10.8% during the period under review, following growth of 13.2% witnessed in the preceding quarter.

We noted that in the reported quarter, the company’s e-commerce comparable sales surged 28.5%. This signals that the company’s efforts to drive online sales bode well. With the wave of digital transformation hitting the sector, retailers are fast adopting the omni-channel mantra to provide a seamless shopping experience, whether online or in-stores. Costco, which shares pace with Walmart (NYSE:WMT) , Amazon (NASDAQ:AMZN) and Target (NYSE:TGT) , is no exception to this trend.

Shares of this Zacks Rank #3 (Hold) company have increased 19.1% compared with the industry’s growth of 22.8% in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Delving Deeper

Net sales rose 10.8% to $32,279 million, while membership fee increased 12.6% to $716 million.

Costco’s comparable-store sales (comps) for the quarter improved 8.4%. The company witnessed comps growth of 7.1%, 8.7% and 15.7% across the United States, Canada and Other International locations, respectively. Costco informed that comps for the month of February increased 10.5% gaining from Chinese New Year. Excluding the effect of gasoline prices and foreign exchange, the company witnessed comps growth of 5.4% during the quarter with the United States, Canada and Other International registering comps growth of 5.7%, 2.5% and 7.4%, respectively.

Costco’s operating income in the quarter increased 20.4% year over year to $1,016 million, while operating margin (as a percentage of total revenues) expanded 30 basis points to 3.1%.

Store Update

Costco operates 749 warehouses, comprising 519 warehouses in the United States and Puerto Rico, 98 in Canada, 38 in Mexico, 28 in UK, 26 in Japan, 14 in Korea, 13 in Taiwan, nine in Australia, two in Spain, one in Iceland and one in France.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,781 million and long-term debt (excluding current portion) of $6,505 million. The company’s shareholders’ equity was $11,754 million, excluding non-controlling interests of $299 million.

Wrapping Up

We believe that Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. The company’s strategy to sell products at heavily discounted prices has helped it to remain on growth track as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. It is also gradually expanding e-commerce capabilities in the United States, Canada, UK, Mexico, Korea and Taiwan.

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