Costco’s Q4 Results Beat Expectations, Stock Falls On Margin Concerns

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Costco (NASDAQ:COST) reported solid fiscal fourth quarter results on Thursday, October 5, as both its revenues and earnings came in ahead of consensus estimates. However, the company’s stock slid after the earnings announcement due to concerns about margins and the longer-term outlook. Below are some key takeaways from the earnings:

  • Costco’s overall revenue increased 16% year-over-year (y-o-y) to around $42 billion in the fourth quarter, driven by incremental revenues from new stores, growth in membership fees and a 6.1% increase in comparable sales.
  • During the same period, Costco’s membership revenue grew 13% y-o-y to $943 million, due to new sign-ups and increased penetration of the company’s higher-fee Executive Membership program. In addition, executive members represented around 38% of the company’s member base in the quarter. Currently, Costco’s member renewal rates are 90.2% in the U.S. and Canada and 87.2% worldwide.
  • On the e-commerce front, online sales increased 27% y-o-y in the quarter.
  • On the cost side, Costco’s selling, general and administrative (SG&A) expenses increased 12% y-o-y to around $4 billion due to increased payroll expenses, higher IT expenditures and growth in e-commerce initiatives.

  • In terms of capital expenditures, the company spent $779 million in this quarter, and close to $2.5 billion for the full year. Going forward, the company plans to spend more in fiscal 2018 as compared to this year, owing to increases in manufacturing and e-commerce activities.
  • Costco reported net earnings of $2.08 per share, up 18% y-o-y. The Citi Visa co-branded credit card program positively impacted the bottom line by $0.13 a share, while gas profits in the quarter increased y-o-y by $0.05 a share.
  • In the fourth quarter, Costco’s comparable store sales increased by 6.1%, including the impact of gasoline prices and currency effects, showing solid growth across all geographies. This growth was driven by both traffic and average transaction size growth. In addition, comparable sales growth was boosted by gasoline price inflation. However, the strengthening dollar negatively impacted the comparable sales growth slightly. The company also saw a 6% growth on a comparable basis excluding these factors.

  • In fiscal 2017, the company opened 26 new stores, which included two new geographic locations, France and Iceland. Going forward, the company plans to open 25 new net warehouses, of which almost 18 would be located in the U.S.

  • On the categories, hardlines (tires, hardware, health and beauty aids), softlines (apparel, housewares) and fresh food all grew in mid single-digits.
  • Consensus estimates for the company’s fiscal first quarter call for earnings of $1.31 per share and revenues of $30.45 billion, implying growth of about 12% and 11%, respectively.

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

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