Costco Earnings Preview: Falling Gas Prices And Strengthening Dollar Will Subdue Growth
Warehouse giant Costco (NASDAQ:COST) is scheduled to release its Q2 fiscal 2015 earnings on March 5th, but it has already reported its key growth metrics in a recent press release. (Fiscal years end with August.) In its January sales update, the company said that its net sales for the three month period ended February 1 increased 6% to $49.01 billion, easily surpassing the growth in the U.S. retail industry during the same period. The warehouse retailer’s overall comparable sales growth for the period stood at 7% with similar growth in the U.S. and international markets. While Costco’s organic growth remained solid during the quarter, as it has been for so long, its reported results were bogged down by negative currency headwinds and declining gasoline prices.
Falling gas prices in the U.S. reduced the retailer’s domestic comparable sales growth from 7% (constant gasoline prices) to 5% (on a reported basis). The impact of strengthening dollar was more profound, as it dragged Costco’s international comparable sales growth down from 7% (on a constant currency basis) to -1% (on a reported basis). Overall, the retailer’s comparable sales growth including the impact of gasoline price deflation and foreign currency fluctuations was at 3%. [1] However, these figures do not reflect under-performance on Costco’s part. They merely indicate that the company’s growth is highly susceptible to gasoline prices and foreign currency exchange rates.
Our price estimate for Costco stands at $130, implying a discount of about 10% to the current market price.
See our complete analysis for Costco
Falling Gasoline Prices Subdue Costco’s Growth
Gasoline prices in the U.S. have been falling consistently over the past several months, thanks to the rise in American oil production and weakening global demand. Since 2008, oil production in the country has gone up every year and American refiners are importing lower foreign oil. Along with this, a contraction in world oil consumption and economic growth are resulting in a situation of oversupply, which in turn has pushed gasoline prices down. Monthly average gasoline prices fell 10% year over year in November, 22% in December and an even more sizable 35% in January. [2] Since Costco offers discounted gasoline at its stores, the significant fall in gas prices has resulted in lower revenues in Q2 fiscal 2015 (Nov-Jan) as compared to the year ago period.
However, excluding the impact of gasoline prices, the company’s growth in the U.S. remained strong at 7%, clearly implying that it had no problems in driving store traffic and its membership base continued to grow during the quarter. We’ll get a better idea regarding the warehouse retailer’s new membership signups and membership renewal rates during its earnings call.
Strong Dollar Thumps International Growth
Over the past one year, the US dollar has appreciated almost 13% across various currencies, which has troubled a number of retailers who earn a significant portion of their revenues from foreign markets. [3] Costco gets almost 25% of its net revenues from markets other than U.S., and hence the strengthening dollar has negatively impacted its sales. Although the company did very well in its international markets, which is evident from its 7% comparable sales growth in constant currency, it did not have the results to show for it. On a reported basis, Costco’s international comparable sales for the second quarter of fiscal 2015 were down 1%.
While the reported results do not reflect any sort of weakness in the company’s performance, they do indicate that Costco’s Q2 fiscal 2015 bottomline growth will be under pressure. The retailer did not generate enough revenues during the quarter due to gasoline price deflation and currency fluctuations, but it would have incurred expenses inline with what it normally does. Therefore, we expect year over year growth in Costco’s profits to remain weak.
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Notes:
- Costco Wholesale Corporation Reports January Sales Results, Costco, Feb 4 2015 [↩]
- Weekly Retail Gasoline and Diesel Prices, U.S. Energy Information Administration [↩]
- Gap expects dollar, port delays to hurt profits this year, Reuters, Feb 26 2015 [↩]