Costco Earnings Preview: Low Gas Prices & Currency Headwinds Expected To Slow Down Growth

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Warehouse giant Costco (NASDAQ:COST) is scheduled to release its Q3 fiscal 2015 earnings after-market hours on May 27. In its April sales update, the company said that its net sales for the 4-week period ended May 3 increased 2% year over year to $8.75 billion, easily surpassing U.S. retail sales year-over-year growth of 0.9% in the same time period. [1] [2] As per the sales report issued in March for the 5-week period ended April 5, net sales on a year-over-year basis remained flat while U.S. retail sales saw 1.7% year-over-year growth. [3] [2] In both March and April, however, organic comparable sales saw growth of 4% and 7%, respectively. While Costco’s organic growth remained strong, as it has been for so long, its net sales were bogged down by negative currency headwinds and declining gasoline prices.

Our price estimate for Costco stands at $146.63, approximately 3% ahead of its current market price.

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Low Gasoline Prices Expected To Subdue Costco’s Growth

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Gasoline prices in the U.S. have been witnessing a decline for 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 less foreign oil. In addition, a contraction in world oil consumption and economic growth are resulting in oversupply, which in turn has pushed gasoline prices down. Monthly average gasoline prices fell by approximately 30% year over year in each of February, March and April. [4] Costco’s quarter ended on May 10, and its reported results for fiscal Q3 will see the impact of falling gas prices in the three months mentioned above. Since Costco offers discounted gasoline at its stores, we expect that the fall in gas prices will result in lower reported year-over-year revenue growth in Q3 2015.

Strong Dollar Thumps International Growth

Over the past one year, the US dollar has been witnessing strong growth, which has troubled a number of retailers who earn a significant portion of their revenues from foreign markets. Although the company continues doing well in international markets, which is evident from its 9% organic comparable sales growth in the 4-weeks ending May 3, net sales growth in the same period was -4%  due to currency headwinds. The U.S. Dollar index stood at 94.87 in April 2015, 19% growth compared to its value of 79.76 in April 2014. [5] This is evident in the graph nearby. The strengthening dollar is anticipated to be a pain point for Costco, which gains almost  25% of its net revenues from markets other than the U.S.  This will weigh down its net sales growth in Q3 fiscal 2015.

The dollar is strengthening compared to other currencies, impacting international revenue growth for U.S. retailers

Excluding the impact of gasoline prices and currency headwinds, the company’s most recently released organic comparable sales growth figures in the U.S. remained strong at 7% in the 4-week period ending May 3. In the same period, international organic comparable sales were a solid 9%. These figures clearly imply that Costco has had no problems in driving store traffic and its membership base continued to grow during this quarter as well. We’ll get a better idea regarding the warehouse retailer’s new membership signups and membership renewal rates during its earnings call scheduled on Thursday, May 28th.

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Notes:
  1. COSTCO Wholesale Corporation Reports April Sales Results, May 6th, 2015, Costco []
  2. United States Retail Sales YoY, May 27th, 2015, Trading Economics [] []
  3. COSTCO Wholesale Corporation Reports March Sales Results, April 8th, 2015 []
  4. Weekly Retail Gasoline and Diesel Prices, U.S. Energy Information Administration []
  5. United States Dollar, May 27th, 2015, Trading Economics []