Costco Rides Higher Comparable Sales To Solid Q1

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Costco (NASDAQ:COST) reported solid fiscal first quarter results on Thursday, December 14, as both its revenues and earnings came in ahead of consensus estimates. The company’s stock was marginally up in extended trading on Thursday. Below are some key takeaways from the earnings:

Growth In Comparable Sales, Membership Fees

Costco’s overall revenue increased 13% year-over-year (y-o-y) to around $32 billion in the first quarter, driven by incremental revenues from new stores, growth in membership fees and an 11% increase in comparable sales. The company also benefited from pre-Thanksgiving and Black Friday holiday weekend sales in the first quarter. During the same period, Costco’s membership revenue grew 10% y-o-y to $692 million, due to new sign-ups and increased penetration of the company’s higher-fee Executive Membership program. Currently, Costco’s member renewal rates are 90% in the U.S. and Canada and 87.2% worldwide.

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Meanwhile, on the e-commerce front, Costco’s online sales increased 42% y-o-y in the quarter. And on the cost side, the company’s selling, general and administrative (SG&A) expenses increased 10% y-o-y to around $3.2 billion due to increased payroll expenses, higher IT expenditures and growth in e-commerce initiatives. In terms of capital expenditures, Costco spent $820 million in the quarter. Going forward, the company plans to spend more in fiscal 2018 compared to fiscal 2017, owing to increases in manufacturing and e-commerce activities.

Costco reported net earnings of $1.45 per share, up 17% y-o-y. The Citi Visa co-branded credit card program positively impacted the bottom line, in addition to higher gas profits in the quarter. The company’s comparable store sales during the fiscal first quarter increased by 11%, including the impact of gasoline prices and currency effects, largely driven by a strong 10% comparable sales growth in the U.S. and 11% in Canada. Excluding gasoline and currency fluctuations, combined comparable sales increased by 8%, driven by 9% growth in the U.S., a 4% rise in Canada and 8% growth in other international markets. In terms of categories, hardlines (tires, hardware, health and beauty aids) and fresh foods were down year-over-year, while food, sundries and softlines (apparel, housewares) grew in Q1.

The Costco’s Q1 growth was driven by both traffic and average transaction size growth. The company’s fiscal first quarter traffic was up 5.9% worldwide and 6.6% in the U.S. Overall, the retailer’s continued growth momentum confirms that it should be able to continue to see healthy traffic at its brick and mortar warehouses despite stiff competition in the grocery sector.

Looking Ahead

In fiscal 2018, the company plans to open 20-25 new net warehouses, of which almost half will be located in the U.S. Consensus estimates for the company’s fiscal second quarter call for earnings of $1.40 per share and revenues of $32.4 billion, implying growth of about 20% and 9%, respectively.

Our $169 price estimate for Costco’s stock is almost 10% below the current market price.

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

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