Why Is Costco (COST) Up 9.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Costco (COST). Shares have added about 9.4% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

Costco’s Earnings Top Estimates in Q3, Increase Y/Y

Costco Wholesale Corporation (NASDAQ:COST) recorded the second straight quarter of positive earnings surprise, when it reported third-quarter fiscal 2019 results. However, total revenues fell short of the Zacks Consensus Estimate for the second quarter in a row.

Notably, both the top and bottom line maintained year-over-year improvement. The company also delivered comparable sales growth across all regions. E-commerce sales during the period were sturdy as well.

Certainly, strength in comparable sales, healthy membership trends, increasing penetration of e-commerce business and other growth-oriented efforts bode well.

Q3 Earnings & Sales Picture

This Issaquah, WA-based company reported adjusted quarterly earnings of $1.89 per share that beat the Zacks Consensus Estimate of $1.83. Earnings improved 11.2% from the year-ago quarter’s $1.70.

Total revenues, which include net sales and membership fees, came in at $34,740 million, up 7.4% from the prior-year quarter’s figure. The figure, however, lagged the consensus estimate of $34,865.1 million.

In the reported quarter, the company’s e-commerce comparable sales rose 22% year over year. Excluding the effect of gasoline prices, foreign exchange and accounting change concerning revenue recognition (ASC 606), the same exhibited a rise of 19.5% year over year. This reflects the company’s efforts to drive online sales.

Delving Deeper

Net sales rose 7.4% to $33,964 million, while membership fee increased 5.3% to $776 million. Categories that performed well include electronics, health and beauty aids, furniture, small appliances, automotive, and optical.

Costco’s comparable sales in the reported quarter grew 5.5%, reflecting an increase of 7%, 1.3% and 1.7% 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 5.6% during the quarter. Notably, the United States, Canada and Other International locations registered comparable sales growth of 5.5%, 5.1% and 6.9%, respectively.

Traffic or shopping frequency rose 3.7% globally and 3.4% in the United States. Average front-end transaction jumped 1.8% on a year-over-year basis. Excluding the impact of foreign exchange, inflation and revenue recognition, the company’s average ticket rose about 1.9%.

Operating income in the quarter increased 5.2% year over year to $1,122 million, while operating margin (as a percentage of total revenues) contracted 10 bps to 3.2%.

Store Update

Costco currently operates 773 warehouses, comprising 536 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, one each in Iceland and France.

During the quarter under review, the company opened three new warehouses, one each in the United States, Korea and Australia. The company plans to open 13 units, including two relocations, in the fourth quarter. This will take the total net new openings for the fiscal year to 21.

Financial Aspects

Costco ended the reported quarter with cash and cash equivalents of $7,013 million and long-term debt (excluding current portion) of $4,799 million. The company’s shareholders’ equity was $14,486 million, excluding non-controlling interests of $334 million. During the quarter, the company bought back shares worth $44 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Costco has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Costco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.