Costco's Q4 Earnings Surge

| About: Costco Wholesale (COST)

Costco Wholesale Corporation (NASDAQ:COST), one of the leading U.S. warehouse club operators, recently posted fourth-quarter 2011 results. The quarterly earnings of $1.08 per share missed the Zacks Consensus Estimate by a penny, but rose 11.3% from 97 cents earned in the prior-year quarter.

The Zacks Consensus Estimate had remained stagnant with only 1 out of 23 analysts covering the stock raising the projection in the last 30 days.

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

Let’s Dig Deep

The warehouse retailer’stotal revenue, which includes net sales and membership fee, climbed 16.8% to $28,178 million from the prior-year quarter. Net sales jumped 16.9% to $27,588 million, whereas membership fee rose 10.7% to $590 million. The Zacks Consensus Revenue Estimate for the quarter was $27,885 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, net sales would have increased 14%.

Costco’s comparable-store sales for the quarter rose 12%, reflecting a comparable sales growth of 10% at its U.S. locations and 19% 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 7%, with U.S. comparable sales up 6%, while international comparable sales were up 10%.

Costco’s operating income surged 10.8% to $762 million, whereas operating margin (as a percentage of total revenue) shriveled marginally by 20 basis points to 2.7%.

September Sales

Comparable-store sales for the month of September climbed 12%, reflecting a comparable sales growth of 11% 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 strengthening foreign currencies, Costco’s comparable-store sales rose 8%, with U.S. comparable sales up 7%, while international comparable sales were up 10%.

Rise in Membership Fees

Costco hinted that with effect from November 1, 2011, annual membership fees for all U.S. and Canada Goldstar, Business and Business add-on members will become $55, representing an increase of $5. Further, annual fees for U.S. and Canada Executive Membership will rise to $110 from $100, and the highest 2% reward related with Executive Membership would jump to $750 from $500.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,009 million, long-term debt of $1,253 million, and shareholders’ equity of $12,573 million.

Costco currently operates 592 warehouses, including 429 in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 9 in Japan, 8 in Taiwan, 7 in Korea, and 3 in Australia.

Our Take

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it offers. The company’s strategy to sell products at heavily discounted prices has helped it to grow in beleaguered economic conditions as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is strongly positioned in the warehouse club industry.

However, Costco faces stiff competition from Sam’s Club, a division of Wal-Mart Stores Inc. (NYSE:WMT), which follows a similar business model as it market high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition, may depress sales and margins.

Currently, we have a long-term Neutral rating on the stock. Moreover, Costco holds a Zacks #3 Rank that translates into a short-term Hold rating, and correlates with our long-term view.

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Tagged: , Discount, Variety Stores, Earnings
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