Costco Earnings Preview: Improving Conditions In The U.S. And Robust International Growth Will Drive Results

Leading U.S. warehouse club Costco (NASDAQ:COST) is scheduled to report its Q4 fiscal 2014 results on October 8. In a recent press release, the company reported that its comparable sales during the quarter increased by a healthy 7%, excluding the negative impact of declining  gasoline prices  and currency effects. Costco’s comparable sales in the U.S. increased by 6% as the company maintained its strong position in the gradually improving retail market. Internationally, the growth was more promising at 8%, which was driven by a rise in number of members in key international markets. ^[1]

Driven by the sluggish economic environment, U.S. buyers in numbers have switched to Costco to take advantage of its attractive bargains. This has translated into significant improvement in new membership signups and renewal rates, which have subsequently boosted comparable sales growth in the U.S. In international markets, Costco has found tremendous acceptance due to its cost-saving shopping model. As a result, the company’s international revenue and comparable sales growth, have outpaced its domestic growth for four consecutive years.

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As the U.S. Market Improves, Costco Performs Better

Costco performed very well in the U.S., even when the retail environment wasn’t too conducive for several retailers including Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). As the market conditions got better, the warehouse giant’s results improved further. In June 2014, the company reported 6% rise in comparable sales, on top of similar growth in the same month last year. During the month, retail sales across the U.S. improved by 3.8% driven by strong sales during the Independence Day weekend, according to Redbook Research. June 2014 was a five-week period on the U.S. retail calender that ended on July 5 and included the Independence Day weekend. ^[2] U.S. buyers opened up their wallets in June as the unemployment rate fell to 6.1%, the lowest rate since the recession set in. ^[3]

In July, Although Costco’s comparable sales growth slowed down a little to 5%, due to a fall in foot traffic, it was still much better than what other retailers realized during the month. The unemployment rate went up slightly to 6.2% and buyers continued to buy more online, where Costco’s presence is limited. However, the company sustained its gross member additions, figures of which will be revealed in the upcoming earnings call. Costco picked up its growth momentum in August with 7% rise in U.S. comparable sales, as consumer sentiment improved due to a better job environment. The Thompson Reuters/University of Michigan consumer sentiment index increased to 84.6 in early September (highest since July 2013) as unemployment rate fell to 6.1% in August and fuel costs came down. ^[4] As a result, consumer affordability improved, supporting an increase in August retail sales of  0.6% month over month. ^[5]

Overall, U.S. retail sales for the June-August period increased by 4.5% and Costco’s comparable sales growth remained 1.5 percentage points ahead of the industry growth. ^[6] This clearly reflects the warehouse giant’s supremacy in the U.S. retail market.

International Results Continue to Impress

Over the past four years, while Costco’s revenues in the U.S. have grown at an average annual rate of 5%, its international revenues have increased by almost 15% annually. It appears that consumers in international markets are welcoming the retailer’s business model, which promotes cost saving. In fact, early signups in Asia and Australia have been very strong, which is encouraging Costco to continue its expansion in these regions. Most of Costco’s growth is coming from its biggest international market – Mexico, where the recent economic slowdown has not troubled the retailer. In constant currency terms, Costco’s international comparable sales increased by almost 8% during June 2014, following 7% growth in the prior month. In the subsequent months, the company’s comparable sales increased by 7% and 8% respectively, taking its quarterly comparable sales growth to 8%. ^[7] Such robust and consistent growth indicates that Costco is gaining momentum in key international markets.

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1. Costco Wholesale Corporation Reports August, Fourth Quarter and Fiscal Year 2014 Sales Results, Costco, Sept 4 2014 [↩]
2. U.S. Retail Sales Fell In June From May – Redbook, 4-Traders, Jul 8 2014 [↩]
3. Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics, Oct 7 2014 [↩]
4. U.S. retail sales move higher; consumer spirits rise, Reuters, Sept 12 2014 [↩]
5. Retail Sales Increase in U.S. by Most in Four Months, Bloomberg, Sept 13 2014 [↩]
6. Advance Monthly Sales for Retail and Food Services August 2014, U.S. Census Bureau News, Sept 12 2014 [↩]
7. Costco Wholesale Corporation Reports July Sales Results, Costco, Aug 7 2014 [↩]