Earnings Scorecard: Costco - Analyst Blog

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted better-than-expected first-quarter 2011 results.

Street analysts had nearly a week to ponder on the news. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts' estimate revisions and the Zacks Rank as well as long-term recommendation for the stock.

Earnings Report Review

Costco's 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 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 revenues, 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.

Costco, which faces stiff competition from BJ's Wholesale Club Inc. (BJ) and Sam's Club, a division of  Wal-Mart Stores Inc. (WMT) informed that 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.

(Read our full coverage on this earnings report: Costco Tops Estimate)

Agreement of Estimate Revisions

Clearly, a positive sentiment is palpable among analysts, who remain optimistic about Costco's performance. Following the earnings release, the Zacks Consensus Estimates have been rising with analysts remaining bullish on the stock, given healthy comparable-store sales trends, effective cost management and potential fee increase. However, a few analysts remain concerned about the tough sales and margin comparisons and the rate of growth in traffic, going forward.

The Zacks Consensus Estimates have been rising with analysts raising their estimates. In the last 7 days, 10 out of 28 analysts covering the stock increased their estimates with 1 analyst lowering the estimate for second-quarter 2011. For third-quarter 2011, 7 analysts changed their estimates in the upward direction, whereas 4 analysts lowered their projections in the last 7 days.

For fiscal 2011 and 2012, 18 analysts and 12 analysts, respectively, have increased their estimates in the last 7 days, with only 1 analyst lowering the estimates for both fiscal 2011 and 2012 in the last 7 days.

Magnitude of Estimate Revisions

In the last 7 days, the Zacks Consensus Estimate for fiscal 2011 rose by 2 cents to $3.31, and for fiscal 2012 the Estimate climbed 4 cents to $3.79. In the last 30 days, the Estimates jumped by 3 cents for fiscal 2011, and by 5 cents for fiscal 2012. 

For second-quarter 2011, Zacks Consensus Estimate rose by a penny to 78 cents, and for third-quarter 2011 it remained stagnant at 75 cents a share in the last 7 days. However, in the last 30 days, the Estimates increased by a cent for both second and third quarters of fiscal 2011.

The estimates in the current Zacks Consensus for second-quarter 2011 range from a low of 73 cents to a high of 80 cents. For fiscal 2011, the estimates range from $3.23 to $3.39.

Costco in Neutral Lane

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 a 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.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

 
BJ'S WHOLESALE (BJ): Free Stock Analysis Report
 
COSTCO WHOLE CP (COST): Free Stock Analysis Report
 
WAL-MART STORES (WMT): Free Stock Analysis Report
 
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