Costco Is Distributing Enough Returns To Shareholders

| About: Costco Wholesale (COST)

Summary

Costco’s comparable sales in May and June 2014 rose 6% year-over-year while the year -to-date revenues rose 4%. The monthly sales increase beat Wall Street’s and Thomson Reuter’s analysts’ expectations.

The company has a higher revenue growth rate compared to its peers.

It has a stable debt and liquidity position when compared to the overall industry averages and has a much better interest coverage ratio.

The first two months, May and June, of Costco Wholesale Corporation's (NASDAQ:COST) fiscal year 2014 fourth quarter brought profitability for the company as Costco's comparable sales in these two months rose markedly. In June 2014, the year-over-year comparables store sales rose 6% beating Wall Street's expectations. The estimates of analysts at Thomson Reuters were also beaten as they expected a 5.3% increase. The metric rose 6% in the U.S. and 7% internationally.

The total reported sales for the month of June are $10.89 billion reflecting a growth of approximately 10% from $9.91 billion during the month of June in 2013.

Source: Investor Relations

Similarly, the comparable sales in the month of May also beat analysts' who expected a growth of only 4.6%. Costco's revenues in this month climbed 8% reporting net sales of $8.78 billion compared to $8.13 billion in May last year.

The year-to-date reported net sales for Costco are $92.88 billion compared to $87.04 billion during the same period previous year indicating a growth of 6.71%. The company's revenue growth was higher than the industry average. In its last reported quarter, the revenue growth of 7.1% was remarkably better than the industry average of 1.39%.

The primary factor behind the increase in the comparable sales is the shopping frequency which offsets the negative effect of lower average amounts spent per visit by members. The rise in the shopping frequency along with an increase in the membership fees support the growth in Costco's year-to-date revenues. The mebership sign-ups at the existing and new warehouses and increased penetration of the premium-priced executive membership program prompted the management to increase the membership fees.

The revenue growth had effectively trickled down to Costco's bottom line in the last reported quarter as the company's net income growth exceeded that of the Food & Staples Retailing industry average. Its net profits in the last reported quarter rose 3.05% when compared to the same quarter prior year, going from $459 million to $473 million.

However, Costco's net profits in the first three quarters declined around 4%, the reason primarily being the higher provision for income taxes and a slight increase in the company's operating expenses. To adequately translate the revenue growth into the bottom line in the future, Costco needs to cut down its operating expenses. However, the company's bottom line growth rate is still far better in comparison to the 5-year industry average growth rate.

Debt Profile

Costco's administration is successfully managing the company's debt profile as depicted by its declining net debt and debt-to-equity ratio. The company's net debt at the end of the third quarter of fiscal year 2014 was $751 million compared to $354 million at the end of fiscal year 2013. Its debt-to-equity ratio in the first nine months of FY14 also declined to 0.41 compared to 0.45 in September 2013. The debt-to-equity ratio is considerably lower than the overall industry average indicating Costco's low with debt.

Source: SEC Filings&money.msn

Moreover, the company's interest coverage ratio is substantially higher than the industry despite the decline in the ratio in the first nine months. The ratio indicates the level of ease through which Costco can pay interest on its outstanding debt compared to its peers.

Liquidity Position

Despite a negative net debt position, Costco has had some problems in covering its short term cash needs as reflected by the company's quick ratio which is currently lower than 1. However, its current ratio is much better than the quick ratio depicting the fact that a substantial amount of the company's current assets are tied in into inventories. However, both Costco's current and quick ratios are higher than other peers in the industry reflecting the stronger liquidity position of the company.

Another factor that adds strength to Costco's liquidity position is the improvement in its operating cash flows. The net cash provided by the operating activities rose to $3,142 million compared to $2,874 million in the third quarter of 2013 indicating a YoY growth of slightly more than 9%. So, I believe that Costco's current liquidity position and operating cash flows would be sufficient to meet its capital needs for the foreseeable future.

Investor's Returns

Costco's Board of Directors declared a dividend of 35.5 cents per share in the third quarter of FY14compared to 31 cents per share in the third quarter of FY13reflecting an increase of 11%. The dividend is $1.42 per share on annualized basis. In addition to this, the company repurchased 1,623,000 shares of common stock at an average price of $113.14 totaling $183.6 million.

Final Thoughts

Costco's comparable sales in the month of May and June and its year-to-date comparable sales predict a more desirable revenue growth for full fiscal year 2014 compared to FY13 consequently improving the company's net profits. However, the company needs to reduce its operating costs to effectively translate top line growth to the bottom.

Costco's debt and liquidity position portrays a satisfactory scenario as well as both the debt and liquidity ratios are better than the overall industry averages.

Through a YoY increase in the cash dividends and a stock repurchase program, the company is distributing enough returns to shareholders and is predicted to generate more value for investors in the future based on its strong fundamentals. Therefore, I would suggest investing in this wholesale stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.