Costco Tops Estimate - Analyst Blog

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted better-than-expected first-quarter 2011 results. The quarterly earnings of 71 cents a share topped the Zacks Consensus Estimate of 69 cents, and rose 18.3% from 60 cents earned in the prior-year quarter.

The Zacks Consensus Estimate increased by a penny with 8 out of 28 analysts covering the stock raising their projections, and none revising their estimates downwards in the last 30 days.

The double-digit increase in the bottom-line was buoyed by growth in the top-line due to improved sales of discretionary items as consumers seeking discounts started flocking to warehouse clubs.The company's international operations have been the major driver.

The warehouse retailer's total revenue, which include net sales and membership fee, climbed 11.2% to $19,239 million from the prior-year quarter, and came ahead of the Zacks Consensus Revenue Estimate of $18,717 million. Net sales jumped 11.2% to $18,823 million, whereas membership fee rose 10.3% to $416 million.

The sales results include contribution from the company's Mexico joint venture. Costco began incorporating results of its Mexican operations on a prospective basis with the commencement of its fiscal 2011 on August 30, 2010. Excluding the contribution from the company's Mexican joint venture, sales would have increased 8%.

Costco's comparable-store sales for the quarter rose 7%, reflecting a comparable sales growth of 5% at its U.S. locations and 14% at its international divisions. The results were favorably impacted by rising gasoline prices and a weaker U.S. dollar.

Excluding the effects of gasoline prices and a softer dollar, Costco's comparable-store sales rose 5%, with U.S. comparable sales up 4%, while international comparable sales were up 10%.

Costco's operating income surged 22.7% to $525 million, whereas operating margin showed a marginal expansion of 20 basis points to 2.7%, as increase in net sales and membership fees offset higher operating expenses.

The company ended the quarter with cash and cash equivalents of $3,739 million, long-term debt of $2,143 million, and shareholders' equity of $11,707 million.

Costco, which faces stiff competition from BJ's Wholesale Club Inc. (BJ) and Sam's Club, a division of  Wal-Mart Stores Inc. (WMT), currently operates 582 warehouses, including 425 in the United States and Puerto Rico, 80 in Canada, 32 in Mexico, 22 in the United Kingdom, 9 in Japan, 7 in Korea, 6 in Taiwan and 1 in Australia.

During the quarter, Costco opened 8 locations. For fiscal 2011, the company currently plans to open 27 net new locations, including 15 in the U.S.

Costco is well positioned to weather the difficult economic environment given its focus on low prices. Rising gasoline prices coupled with improved consumer spend helped comparable-store sales growth. Moreover, expansion into new markets will continue to boost the top line.

We believe that retailers will continue with their discounting pattern to lure consumers still grappling with unemployment woes and tight credit market. However, aggressive price reductions in response to stiff competition may depress sales and margins.

Currently, we have a 'Neutral' rating on Costco. Moreover, the Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation, correlates with our long-term view.

 
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