Key Takeaways From Costco’s Q1 Earnings
Costco (NASDAQ:COST) reported relatively disappointing fiscal first quarter results on Wednesday, as both its revenues and earnings missed consensus estimates. The company’s overall revenue increased 3.2% year-over-year (y-o-y) to $28 billion during the quarter, driven by incremental revenues from new stores and growth in membership fees. However, the retailer’s revenue fell short of the Reuters’ consensus estimate by $830 million. In Q1, Costco’s growth was once again driven by a consistent rise in its member base. The company reported strong renewal rates over the first quarter at 90.3% in the U.S. and Canada and 87.5% worldwide, including increasing penetration of executive memberships. The retailer’s membership revenue grew 6% y-o-y to $630 million. Although Costco’s comparable sales reported an overall 1% increase, it should be noted that the strengthening dollar had a negative impact on the company’s growth in the first quarter.
Costco benefited from a non-recurring $51 million legal settlement in this quarter. This $51 million pre-tax figure along with increased stock compensation expense in the first quarter, partially offset by lower profits from gas, led to a 14% y-o-y increase in the company’s net earnings to $1.24 per share. Moreover, the company’s selling general and administrative (SG&A) expenses increased 4.8% y-o-y to $2.9 billion due to increased IT expenses and lower y-o-y merchant fees as a result of the switch to Citi Visa. Additionally, Costco’s total online sales were also up by 8% y-o-y in the quarter. 
Costco’s comparable store sales were negatively impacted by a strong dollar, as it reported just 1% growth in comparable store sales during the first quarter. This growth was driven by a 2.2% y-o-y increase in average shopping frequency, offset by a 1.3% y-o-y decrease in average transaction on a reported basis. Moreover, an increase in deflation in merchandising categories such as foods also impacted the company’s comparable sales growth. However, excluding the negative impact of gasoline prices and currency effects, the combined comparable sales increased by 2% driven by 1% growth in the U.S., a 5% rise in Canada and 3% growth in other international sales. 
Costco added 8 new locations in the first quarter. The company also announced its plan to open 31 warehouses in fiscal 2017, which would translate to around 4.25% square footage growth.
Updates On Citi Visa Anywhere Card
Costco stopped accepting American Express at all U.S. and Puerto Rico Costcos and on Costco.com, and began accepting Visa cards, including the new Citi Visa Anywhere card, in the fourth quarter of fiscal 2016. Almost 11.4 million American Express cards were transferred over to Citi during the conversion process. According to the company, over 85% of the accounts transferred have been activated already. Also, the company has approved around 1 million new Citi Visa cards since the cutover in June. ((Costco’s Wholesale Q1 2017 Results – Earnings Call Transcript, SeekingAlpha, Dec 7 2016))
Future Outlook
Costco did not publish any guidance for the upcoming earnings, but consensus estimates for the company’s second quarter of fiscal 2017 expects earnings of $1.36 per share and revenues of $29.81 billion, implying growth of about 10% and 6%, respectively.
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