Earnings Preview – Costco - Analyst Blog

Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, is scheduled to report its fourth-quarter 2010 financial results before the bell on Wednesday, October 6, 2010. The current Zacks Consensus Estimate for the quarter is 95 cents a share.

Third-Quarter 2010, a Synopsis

On May 27, 2010, Costco reported third-quarter 2010 results. The quarterly earnings of 66 cents a share, remained in line with the Zacks Consensus Estimate, and rose 24.5% from 53 cents in the prior-year quarter. On a reported basis, including one-time items, the quarterly earnings came in at 68 cents, up 41.7% from 48 cents in the prior-year quarter.

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

The warehouse retailer stated that total revenue, which include net sales and membership fee, climbed 12.5% to $17,780 million from the prior-year quarter. Costco’s comparable-store sales for the quarter rose 10%, reflecting a comparable sales growth of 6% at its U.S. locations and 26% at its international divisions.

Fourth-Quarter 2010 Consensus

Analysts surveyed by Zacks, expect Costco to post fourth-quarter 2010 earnings of 95 cents a share. The current Zacks Consensus Estimate represents a year-over-year growth of 14.5%. The current Zacks Consensus Estimate for the quarter range from a low of 90 cents to a high of 99 cents. 

The current Zacks Consensus Estimate has remained stagnant over the last 30 days, with only 1 out of 26 analysts covering the stock having revised his estimate in the upward direction. In the last 7 days, no analysts have revisited their estimates keeping the consensus unchanged.

With respect to earnings surprises, Costco has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 1.4% to positive 7.8%. The average remained at positive 2.7%. This suggests that Costco has outperformed the Zacks Consensus Estimate by an average of 2.7% in the last four quarters.

Costco Holds Zacks #3 Rank

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.

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

However, Costco faces stiff competition from BJ’s Wholesale Club Inc. (BJ) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT). These two rivals follow similar business models as they market high volumes of merchandise at low prices in a membership-only warehouse clubs. Thus, aggressive pricing in response to stiff competition, to gain market share and drive traffic, may depress sales and margins.