Costco's (COST) Sturdy Online Sales Aid Q1 Earnings Beat

Amid a tough retail landscape Costco Wholesale Corporation (NASDAQ:COST) commenced fiscal 2018 on an upbeat note backed by growth strategies, sturdy e-commerce sales and increased penetration of Citi Visa co-brand card program. This is the third consecutive quarter of better-than-expected results for this operator of membership warehouses.

This Issaquah, WA-based company posted adjusted quarterly earnings of $1.36 per share that beat the Zacks Consensus Estimate by a penny and increased 16.2% from the prior-year period. Total revenues, which include net sales and membership fee, came in at $31,809 million surpassing the consensus estimate of 31,520.7 million and jumped 13.2% year over year.

Major chains are grappling with sluggish store and mall traffic as consumers choose to shop online from the comfort of their homes. But Costco seems somewhat resilient to the challenging retail backdrop. We noted that in the reported quarter, the company’s e-commerce comparable sales increased 43.5%. This signals that the company’s efforts to drive online sales bode well.

To drive online sales further, Costco recently launched new delivery services for customers — one CostcoGrocery option to deliver non-perishable items to buyer’s home within two days of ordering and another same day grocery delivery service in collaboration with Instacart. These initiatives provide the company a competitive platform against Wal-Mart (NYSE:WMT) , Amazon (NASDAQ:AMZN) and Target (NYSE:TGT) . Target recently acquired Shipt, Inc., a same-day delivery service platform.

Costco Wholesale Corporation Price, Consensus and EPS Surprise

Costco Wholesale Corporation Price, Consensus and EPS Surprise | Costco Wholesale Corporation Quote

Delving Deeper

Net sales rose 13.3% to $31,117 million, while membership fee increased 9.8% to $692 million. Global e-commerce sales surged 40% to $1.3 billion.

Costco’s comparable-store sales (comps) for the quarter improved 10.5%. The company witnessed comps growth of 10.3%, 11.3% and 10.1% across the United States, Canada and Other International locations, respectively. Traffic increased 5.9% globally and 6.6% in the United States.

Excluding the effect of gasoline prices and foreign exchange, the company witnessed comps growth of 7.9% during the quarter with the United States, Canada and Other International registering comps growth of 8.7%, 4.3% and 8.2%, respectively.

Shares of Costco have outpaced the Zacks Retail-Discount Industry in a year gaining from sturdy comps performance. In a year, this Zacks Rank #3 (Hold) stock has rallied 16.3%, while the industry, which occupies a space in the bottom 28% (185 out of 256) among the Zacks classified industries, has advanced 6.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Costco’s operating income in the quarter increased 12% year over year to $951 million, while operating margin (as a percentage of total revenues) remained flat 3%. However, gross margin contracted 33 basis points, after shrinking 15 basis points in the fourth quarter of fiscal 2017. Management expects incremental costs related to new centralized return facilities may hurt margins in the next two quarters.

Store Update

Costco operates 746 warehouses, comprising 518 warehouses in the United States and Puerto Rico, 98 in Canada, 37 in Mexico, 28 in UK, 26 in Japan, 13 in Korea, 13 in Taiwan, nine in Australia, two in Spain, one in Iceland and one in France.

During the quarter, the company opened seven locations (five net openings and two relocations). During fiscal 2018, the company plans to open 20 and 25 warehouses with over half in the United States, three in Canada, two in Korea and one each in Australia and Mexico. It also plans to relocate six warehouses — four in the United States and two in Canada.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $5,689 million and long-term debt (excluding current portion) of $6,478 million. The company’s shareholders’ equity was $11,078 million, excluding non-controlling interests of $278 million. During the quarter, the company incurred capital expenditures of $820 million and bought back 734,000 shares for $119 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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