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Costco Wholesale Corporation (NASDAQ:COST) and Family Dollar Stores, Inc. (NYSE:FDO) both reported earnings this week. The Retail-Discount Stores industry has seen a one-year return of 29.89% while the Cyclical Consumer Goods sector in general has risen 37.9%. Yesterday, Costco's management discussed its F4Q 2013 results; Richard Galanti, EVP and CFO highlighted that Costco's rotisserie chicken (over 60 million sold a year), priced at under $5, leaves the company with a very low margin but a lot of a positive press. In Galanti's words, "we do better when we're reducing prices and driving business and overall that's good for us better than others."

We analyze Costco's preliminary financial results for the year ended 2013-08-31. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise) and is relative to its peers. See the end of this post for the peer set we used. These peers include Family Dollar Stores, Inc. which also reported results yesterday. Our earnings analysis: Family Dollar Stores Earnings Analysis: Overstatement of reported net income? You might also want to check out Hitting the Wall? Wal-Mart (NYSE:WMT) Earnings Analysis which we published the day after Wal-Mart discussed its results.

The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2013-08-31 2012-08-31 2011-08-31 2010-08-31 2009-08-31
Revenues 105,156.0 99,137.0 88,915.0 77,946.0 71,422.0
Revenue Growth % 6.1 11.5 14.1 9.1 (1.5)
Net Income 2,039.0 1,709.0 1,462.0 1,304.0 1,086.0
Net Income Growth % 19.3 16.9 12.1 20.1 (15.3)
Net Margin % 1.9 1.7 1.6 1.7 1.5
ROE % 17.6 14.0 12.8 12.5 11.3
ROA % 7.1 6.3 5.8 5.7 5.1

Volume Driven Operating Model relative to peers

Costco Wholesale Corporation's current Price/Book of 4.6 is about average in its peer group. The market expects more growth from Costco than the average of its chosen peers (PE of 24.7 compared to peer average of 17.9) and to improve its current ROE of 17.6% which is around peer average.

The company's net profit margins have been relatively poor (currently 1.9% vs. peer average of 3.6%) while its asset efficiency is better than the peer average (asset turns of 3.7x compared to 2.7x). This suggests a volume driven operating model relative to its competitors. Costco's net margin is its highest relative to the last five years and compares to a low of 1.5% in 2009.

Faster Growth Ahead

While Costco's revenue growth has been around the peer average in recent years (10.5% vs. 9.7% respectively for the past three years), the market gives its shares a higher than peer average PE ratio of 24.7. The market seems to see faster growth ahead.

Costco's annualized rate of change in capital of 6.8% over the past three years is greater than the average of 4.8%. However, this investment level has only generated a peer average return on capital of 12.3% averaged over the same three years. This average return on an above average capital investment suggests the company is overinvesting.

Earnings Quality

Costco reported relatively weak net income margins for the last twelve months (1.9% vs. peer average of 3.6%). However, the company booked a level of accruals that is around peer average (1.5% vs. peer average of 1.5%) for the same period, suggesting that its reported net income is supported by a reasonable level of accruals.

Costco's accruals over the last twelve months are around zero. This level is also around the peer average suggesting a proper level of reserves.

Costco Wholesale Corporation Trend Charts

(click to enlarge)(click to enlarge)(click to enlarge)

Peers

Costco Wholesale Corporation's earnings analysis uses the following peer-set: Wal-Mart Stores, Inc., Target Corporation (NYSE:TGT), Dollar General Corporation (NYSE:DG), Dollar Tree, Inc. (NASDAQ:DLTR), J Sainsbury plc Sponsored ADR (OTCBB: JSAIY), Family Dollar Stores, Inc., PriceSmart, Inc. (NASDAQ:PSMT) and Big Lots, Inc.(NYSE:BIG).

Relevant articles from our archives:

Family Dollar Stores Earnings Analysis: Overstatement of reported net income?
Hitting the Wall? Wal-Mart Earnings Analysis
Earnings Analysis: Dollar General Corp.
Earnings Analysis: Big Lots Inc.
Earnings Analysis: Wal-Mart Stores Inc.
Earnings Analysis: Family Dollar Stores Inc.

Disclaimer

Source: Costco Earnings Analysis: Faster Growth?