Costco Q4 Earnings: What To Expect?

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Costco (NASDAQ:COST) is scheduled to announce its fourth quarter results on Thursday, September 29.  The company reported mixed results in the third quarter, with revenue missing market expectations while earnings per share beat consensus estimates.

Q3 2016 Recap

Costco’s revenue increased 2.6% year-over-year (y-o-y) to $26.77 billion during the third quarter, while its earnings of $1.24 per share were up 2 cents per share over Q3 2015 results. Its membership income grew by 6% y-o-y. The retailer posted flat comparable U.S. sales for the first time in six years, owing to low spending by Costco’s high income customers in third quarter. Comparable sales growth excluding the negative impacts from gas price deflation and foreign exchange fluctuations were up 3%, below the average analyst estimate of 4.6%.

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Key Development

One of the most important things that happened during the quarter for Costco was the transition of its branded credit card (Costco Anywhere Visa card) from American Express to Citigroup in June. As a part of the agreement, only Visa cards would be accepted at Costco stores. This credit card offers 4% cash back on the first $7000 spent at gas stations globally, including 3% back on dining and 2% back on other Costco purchases.

The Costco card transition did not go particularly smoothly, as the company received many complaints from customers initially. The problems that Citi and Costco faced ranged from delays in getting new cards to issues with automatic payments and long hold times for calls to customer service desks. Around 14% (11 million) of the existing customers carried the previous American Express card, which needs to be converted into new Citi Visa card. We expect Costco to share details about the success of this process in the fourth quarter earnings.

Upcoming Q4 Earnings Expectations

Reuters’ compiled analyst estimates forecast revenues of $36.9 billion and earnings of $1.73 per share for the upcoming fourth quarter. Costco reported its fourth quarter and fiscal 2016 (August ending) net sales figures last month. The company reported net sales of $35.7 billion, up 2% y-o-y since same period last year. For the full year 2016, Costco’s net sales increased 2% y-o-y to $116.1 billion from $113.7 billion.

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Going forward, if Costco’s membership fees as percentage of net sales remain at 2% as seen in the historical trend, we can expect the fourth quarter’s top line to fall just short of the consensus estimates.

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Costco also reported flat comparable sales compared to year-ago levels. It posted flat growth in the U.S. along with 2% growth in Canada. However, Costco’s comparable sales excluding the impact of gasoline prices and foreign currency fluctuations grew by 3%, driven by 5% growth in Canada and 2% growth in the U.S.

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Have more questions about Costco? Please refer to our complete analysis for Costco

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