Earnings Preview: Costco Set To Deliver Yet Another Earnings Beat As Domestic Business Remains Strong
Discount warehouse giant Costco (NASDAQ:COST) is scheduled to release its earnings for the fourth quarter and full year ending August 2015 early next week, on September 29 [1]. In the previous three quarters, Costco managed to beat earnings expectations each time, with nine-months EPS of $3.64 vs. a consensus cumulative estimate of $3.41. [2] Despite slowing retail growth domestically and a strong dollar that negatively impacted international revenues, the company managed to cross the line with some help from one-time gains like tax benefits and cost recoveries.
We expect Costco to beat estimates yet again in Q4, as headwinds such as low oil prices and strengthening local currency have eased out a bit. Per the company’s monthly sales reports, Costco has also managed to hold its sales growth steady even though industry sales have declined in the recent past. Below, in this article, we take a closer look at these factors and analyze their impact on Costco’s earnings.
See our complete analysis for Costco
Domestic Sales Growth Remains Strong Despite Industry Slowdown
Retail Sales growth in the United States decreased from about 4% in January to 2% in August (year-over-year) and, as indicated in the figure below, continues to be on a downtrend [3]. On the other hand, Costco has managed to maintain sales growth in the U.S. [4], even though it has higher than average exposure to oil prices through the gas it sells, which has had a negative impact of between 3%-5% on domestic sales this year.
This could be attributed the fact that Costco, being a discount warehouse, is relatively less-affected by fluctuations in consumer sentiment. In the month of September, the University of Michigan’s reading on the overall index of consumer sentiment fell to a 12-month low of 85.7 [5]. As most of Costco’s revenues come from consumers’ non-discretionary spending, it was shielded from this phenomenon. Moreover, weaker economic conditions can induce shoppers to seek lower cost alternatives, including Costso.
Currency Headwinds Ease Out
Over the past few quarters, the US dollar has significantly appreciated vs. most other global currencies. As a result, the value of Costco’s international sales has been on a decline as reported in U.S. dollars, though it continues to grow at a healthy rate of 5 to 10 percent, excluding the negative impact of currency effets.
The U.S. Dollar index, which tracks a basket of currencies, hovered around 95 for the most part of the quarter ending August, compared to a range closer to 100 during the previous quarter ((United States Dollar, Trading Economics)). As Costco generates almost 25% of its revenues from markets outside the U.S., the stabilization of the U.S. Dollar will help prevent a further decline in the company’s international sales in the local currency.
Our price estimate for Costco stands at $140, which is almost at par with the current market price. We will cover Costco’s earnings release in another article next week.
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