The Street Reacts To Costco's Big Q2 Earnings Beat

Costco Wholesale Corporation COST reported fiscal second-quarter results that handily beat expectations while same-store sales were strong at 6.7 percent.

Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

• RBC Capital Markets' Scot Ciccarelli maintains an Outperform rating on Costco with a price target lifted from $235 to $250.
• Bank of America's Robert Ohmes maintains at Buy, unchanged $255 price target.
• Raymond James' Budd Bugatch maintains at Outperform, price target lifted from $240 to $250.
• Morgan Stanley's Simeon Gutman maintains at Equal-weight, unchanged $220 price target.
• Tigress Financial Partners' Ivan Feinseth.

Costco's stock traded higher by 5.5 percent at $228.62 per share Friday morning.

The Key Points

Costco's earnings is highlighted by six key points, Ciccarelli said in a research report. These include:

1. U.S. comps of 7.2 percent beat estimates of 7.percent and total comps of 6.7 percent beat expectations of 6.5 percent;
2. Membership fee increase (MFI) of 7 percent was "up nicely" to $768 million;
3. Gross margins rebounded to 13.2 percent versus expectations of 12.9 percent;
4. Gross profit of $4.676 billion was $23 million better than expected;
5. SG&A of $3.464 billion was $71 million better than expected; and
6. EBIT of $1.2 billion was $0.1 billion better than expected.

Healthy Membership Rates

One of the key metrics to gauge Costco's profit outlook is membership rates and this metric remained healthy in the reported quarter, Ohmes said in a research report. Membership fees were 7.3 percent higher in the quarter and the fee increase accounted for roughly half of the growth. Membership renewal rates also showed signs of improvement in both the U.S. and international markets as did growth in member households per store.

Also important to the bull case is continued e-commerce momentum, the analyst wrote. Encouragingly, online sales grew 25.5 percent in the quarter due to better online merchandising, inclusion of higher-end products, digital marketing and better delivery options. While e-commerce sales are dilutive to margins it is also EBIT margin accretive due to lower SG&A.

Strength Of Business Model

Costco's "impressive" report marks the continuation of comparable sales momentum over the past year against challenging prior year comparisons, Bugatch said. The company is achieving success mostly due to the strength of its business model in which new and existing members see value in what the brand has to offer.

More important to the bullish case is the consistent mid-single digit U.S. customer traffic growth, which signals management remains focused both generating growth without impacting the customer experience. The analyst said there's a reason to believe the company can continue gaining market share and members over the coming years through new club openings in both the US and international markets.

Unsustainable Beat?

Gutman said Costco's 20-percent beat may signal strong trends in the core business, but the magnitude of the beat is unlikely to be sustainable. For example, EPS came in better than expected by 32 cents, but around 23 cents of the beat was due to higher EBIT dollars.

Around 9 cents were due to below the line items like FX-related income and a one-time foreign tax credit. Some of the remaining beat can be attributed to higher than usual gas profit but gas prices shifted higher exiting Costco's quarter.

Around 80 percent of the earnings outperformance is due to items that are unlikely to continue over the long-term and EPS growth should moderate moving forward, the analyst wrote.

Increasing Comp Trends Continue

Costco has now posted 12 consecutive quarters of increasing comps aided by a strong private label offering, improvements in fresh food and new technologies to speed up the shopping experience, Feinseth said in his daily newsletter.

The company also benefits from a very loyal customer base that is willing to pay an upfront membership fee to shop at its "treasure hunt-like" stores, he said. Encouragingly, the number of people willing to pay for memberships continues to increase despite the recent price increase.

"I believe further upside exists from current levels and continue to recommend purchase," Feinseth wrote.

Related Links:

A Bull And Bear Analyze Costco's Q1 Earnings Print

Takeaways From This Week's Surprising Retail Earnings

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