An Overview Of Costco’s Q1 Earnings and Beyond

by Trefis Team
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Costco‘s (NASDAQ: COST) fiscal first quarter earnings per share came in below market expectations on an adjusted basis, while revenues saw a slight beat. In Q1, Costco’s total revenue increased 10% year-over-year (y-o-y) to around $35 billion, driven by growth in membership fees and a 9% increase in comparable sales. The retailer reported net earnings of $1.73 per share, up 20% y-o-y. The results were driven by a tax benefit related to stock-based compensation and to the implementation of the tax regulation act. Also, the quarter included a charge for an adjustment to its estimate of breakage on rewards earned prior to the fiscal year 2019 for the Citi/Visa co-branded credit card program.

Our $236 price estimate for Costco’s stock is slightly ahead of the current market price. We have created an interactive dashboard on What To Expect From Costco’s Fiscal Q2 Earnings, which outlines our forecasts for the company’s next quarter. You can change expected revenue, operating margin and net margin figures for Costco to gauge how it will impact expected EPS for the fiscal second quarter. We expect Costco’s revenue and earnings to grow in Q2, primarily due to the company’s value offerings and high membership renewal rates, coupled with cost and productivity savings.

Growth In Comparable Sales, Membership Fees

Costco reported that its comparable store sales increased 9% during the fiscal first quarter, including the impact of gasoline prices and currency effects, largely driven by 11% comparable sales growth in the U.S. and 2% in Canada. Excluding gasoline and currency fluctuations, combined comparable sales increased by 8%, driven by 8% growth in the U.S. and a 6% rise in Canada and other international markets. The top growth categories in this quarter were grocery, consumer electronics, hardware, health and beauty aids and automotive. Additionally, Costco’s growth was driven by both traffic and average transaction size growth. The company’s fiscal first quarter traffic was up 4.9% worldwide and 5.2% within the U.S. Overall, the company’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.

Costco’s membership revenue grew 10% y-o-y to $758 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 90.5% in the U.S. and Canada and 88% worldwide. Meanwhile, on the e-commerce front, Costco’s online sales increased 32.3% y-o-y in the quarter. And on the cost side, the company’s selling, general and administrative (SG&A) expenses increased 8% y-o-y to around $3.5 billion due to increased payroll expenses, higher IT expenditures and growth in e-commerce initiatives.

Costco mentioned that it plans to open its first Chinese location, in Shanghai, next September. Consensus estimates for the company’s fiscal second quarter call for earnings of $1.72 per share and revenues of $35.5 billion, implying growth of about 8% and 10%, respectively.

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