Costco Meets Earnings Estimates; Sales Growth Remains Slow

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Costco (NASDAQ:COST) reported its Q3 fiscal 2015 earnings today. The company reported net earnings of $1.17 per share, a year-over-year increase of 9% that was slightly ahead of analysts’ expectations at $1.16 per share. [1] Net sales as well as the overall revenues increased slowly by approximately 1%, even as total comparable sales saw a decline. Although Costco’s comparable sales numbers for the third quarter look far from pleasing, it must be noted that a fall in gasoline prices and the strengthening dollar had a significant negative impact on the company’s growth. Excluding this impact, Costco’s comparable sales actually witnessed a growth of 6%. [2]

Our price estimate for Costco stands at $146.63, approximately 1% ahead of its current market price. We will be updating our price estimate in light of the recent earnings.

See our complete analysis for Costco

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Membership Continues To Remain Strong

Costco’s growth was once again driven by a consistent rise in its member base. Membership revenue grew 4% on a year-over-year basis. Excluding the impact of foreign exchange, this growth amounted to 7%, reasserting the fact that despite lower than expected reported numbers, Costco’s business continues to show no signs of concern for investors. Renewal rates at Costco over this quarter remained strong at 91% in the U.S. and Canada and 88% worldwide. New member signs ups were slightly lower in the quarter, however this can be attributed to the timing of new store openings. In the fiscal Q3 2015, Costco opened four new warehouses spread in the U.S., Canada and Mexico, including two relocations. Hence, net new openings in the quarter were  two warehouses. In the same quarter last year, Costco had four new openings in Asia, and new openings generally result in spike of new member sign ups. New warehouses in Asia typically see an average of 30,000-40,000 signups in the first eight to twelve weeks. [3] As a result, on a year-over-year basis, new member sign-ups seemed relatively low. Costco intends to open fourteen new warehouses in the fourth quarter, of which eight will be located in the North America, one in Europe and five in Asia. Consequently, new member sign ups should witness a boost in the next quarter. [4]

Costco Online Experiencing Growth, Incremental Expenses In IT Will Continue Through Fiscal 2015

Costco Online currently operates in four countries including the U.S., Canada, Mexico and U.K. Reported from the e-commerce channel witnessed a strong growth of 18% globally. If the negative impact of FX is ruled out, this growth amounted to an impressive 21%. As Costco’s e-commerce channel is gaining strength, the company intends to continue its IT modernization efforts through the remainder of this year. In fiscal Q3 2015, excluding the impact of FX and gas price delines, SG&A witnessed an increase of five basis points attributable to IT modernization. A similar impact is expected in the fiscal Q4 2015 as well. Overall SG&A expenses in the quarter were 25 basis points higher in fiscal Q3 2015 on a year-over-year basis. However, excluding the impact of gasoline prices, overall SG&A witnessed a drop of 10 basis points despite incremental technology expenses due to effective cost management. [4]

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Notes:
  1. Costco Wholesale Corporation, Yahoo! Finance []
  2. Costco Wholesale Corporation Reports Third Quarter and Year-To-Date Operating Results for Fiscal 2015, May 27th, 2015, Costco []
  3. Costco’s Global Expansion… With a Twist, July 14, 2014, Motley Fool []
  4. Costco Wholesale (COST) Q3 2015 Results – Earnings Call Transcript, May 28th, 2015, Seeking Alpha [] []