Key Takeaways From Costco’s Q2

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Costco‘s (NASDAQ:COST) earnings came in ahead of consensus estimates but revenues missed, as it reported its fiscal second quarter earnings on March 7. The company’s stock was marginally down in extended trading on Wednesday. However, the company’s overall revenue increased 11% year-over-year (y-o-y) to around $33 billion in the second quarter, driven by growth in membership fees and an 8% increase in comparable sales. Costco reported net earnings of $1.59 per share, up 36% y-o-y, which included 17 cents due to a net income tax benefit of $74 million as a result of the tax legislation recently passed. We have created an Interactive Dashboard which outlines our forecasts for the company and our expectations for its Q3 earnings. You can change expected revenue, operating margin and income margin figures for Costco to gauge how it will impact expected EPS for the current quarter.

Growth In Comparable Sales, Membership Fees

The company’s comparable store sales during the fiscal second quarter increased by 8%, including the impact of gasoline prices and currency effects, largely driven by a 7% comparable sales growth in the U.S. and 9% in Canada. Excluding gasoline and currency fluctuations, combined comparable sales increased by 5%, driven by 6% growth in the U.S., a 2% rise in Canada and 7% growth in other international markets. In terms of categories, hardlines (tires, hardware, health and beauty aids), fresh foods and sundries were up, while softlines (apparel, housewares) declined marginally in Q2. Additionally, Costco’s growth was driven by both traffic and average transaction size growth. The company’s fiscal second quarter traffic was up 3.7% worldwide and 3.4% 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 in the long run.

Costco’s membership revenue grew 13% y-o-y to $716 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 90.1% in the U.S. and Canada and 87.3% worldwide. Meanwhile, on the e-commerce front, Costco’s online sales increased 29% y-o-y in the quarter. And on the cost side, the company’s selling, general and administrative (SG&A) expenses increased 9% y-o-y to around $3.2 billion due to increased payroll expenses, higher IT expenditures and growth in e-commerce initiatives. Going forward, the company plans to spend more in fiscal 2018 compared to fiscal 2017, owing to increases in manufacturing and e-commerce activities.

Looking Ahead

In fiscal 2018, the company plans to open nearly 23 net new warehouses, of which almost half will be located in the U.S. Consensus estimates for the company’s fiscal third quarter call for earnings of $1.67 per share and revenues of $31.2 billion, implying growth of about 5% and 8%, respectively.

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