Costco Wholesale (COST), the largest discount warehouse retailer in the nation, reported fiscal first quarter results that showed steady improvement from a year ago. The quarter went just about as analysts had expected with EPS coming in at 60 cents per share. Net income was up 1.1% from a year ago at $266 million. Sales, including membership fees, also came in right in line with expectations at about 6% over a year ago, $17.3 billion in total. U.S. same store sales showed a respectable gain of 3% as well, but international same store
sales were really the highlight of the day coming in 13% better than last year. The company saw margins pressured somewhat by lower food and electronics prices, as it fell nine basis points to 10.88%.
In addition to the largely unremarkable quarterly results, the highly visible dispute between Costco and Coca-Cola (KO) ended today. In mid-October Costco announced that they would no longer carry Coke products do to inflexibility in offering attractive discount pricing. These sorts of rifts are certainly not out of the ordinary in the course of negotiations, but this one was notable because of the very public nature. According to Costco, they never pulled the products off the shelf but instead simply did not order anymore. As of today, differences were resolved and Coke products will be available at Costco in the coming days. In reality, the squabble had a minimal effect on either of these massive company’s bottom
lines, but some loyal Coke consumers may have been a little agitated by the nuisance.
Coming into this week we had a Fairly Valued stance on Costco, and there was nothing unexpected in the report that will make us change that rating in the coming week. Based on what the market has been willing to pay for Costco in the past ten years, it is currently comfortably within the expected price-to-cash earnings range. However, at a price-to-sales of 0.361x, it is certainly near the low end of its traditional valuation range of 0.360x to 0.544x. Given the consistent performance of Costco throughout what has been a tough time for retailers, we would expect to see Costco trading in the low to mid $60’s based on the current fundamentals. That being said, there are other discount retailers that we believe are more attractive at current prices as you can see from the chart of discounters that we currently cover to the right.
