Costco Wholesale Corporation (COST), one of the leading U.S. warehouse club operators, recently posted better-than-expected second-quarter 2011 results. The quarterly earnings of 79 cents a share came a penny ahead of the Zacks Consensus Estimate, and rose 12.9% from 70 cents earned in the prior-year quarter.
The Zacks Consensus Estimate had remained stable prior to the earnings release, despite of 7 out of 28 analysts covering the stock raising their projections in the last 30 days.
The double-digit increase in the bottom-line was buoyed by growth in the top-line due to improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs. The company’s international operations have been the major driver.
The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 11.4% to $20,875 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $20,545 million. Net sales jumped 11.4% to $20,449 million, whereas membership fee rose 10.4% to $426 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. The company’s Mexican joint venture contributed a 3% increase in sales.
Costco’s comparable-store sales for the quarter rose 7%, reflecting a comparable sales growth of 5% at its U.S. locations and 12% at its international divisions. The results were favorably impacted by rising gasoline prices and a weaker U.S. dollar. Management also informed that comparable-store sales for February 2011 rose 8%, reflecting a comparable sales growth of 6% at its U.S. locations and 14% at its international divisions.
Excluding the effects of gasoline prices and a softer dollar, Costco’s comparable-store sales rose 4%, with U.S. comparable sales up 3%, while international comparable sales were up 8%. For February 2011, comparable-store sales climbed 5%, reflecting a comparable sales increase of 4% at its U.S. locations and 7% at its international divisions.
Costco’s operating income surged 26.8 % to $596 million, whereas operating margin showed a marginal expansion of 40 basis points to 2.9%, as increase in net sales and membership fees offset higher operating expenses.
The company ended the quarter with cash and cash equivalents of $3,355 million, long-term debt of $2,144 million and shareholders’ equity of $12,124 million.
Costco currently operates 581 warehouses, including 424 in the United States and Puerto Rico, 80 in Canada, 32 in Mexico, 22 in the United Kingdom, 9 in Japan, 7 in Korea, 6 in Taiwan and 1 in Australia. During fiscal 2011, the company plans to open 15 to 16 new warehouses.
Costco continues to be a dominant retail wholesaler based on the breadth and quality of its merchandise. The company’s strategy to sell products at heavily discounted prices has helped it to grow under 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 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 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. However, Costco holds a Zacks #2 Rank, which translates into a short-term Buy rating.
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