Costco (NASDAQ: COST) is scheduled to report its fiscal second-quarter results on Thursday, March 4. We expect COST to likely beat the revenue and earnings expectations, driven by growth in comparable sales. The warehouse club operator is firing on all cylinders during the pandemic as more consumer dollars are getting directed towards goods rather than experiences. In fact, Costco’s sales have surged almost 12% in fiscal 2020 (year ended August 2020), even though it didn’t invest in the curbside pickup or other omnichannel strategies that would have raised expenses. It should be noted that Costco’s comparable sales shot up 17% (excluding the impacts of currency fluctuations and gasoline price deflation) in fiscal Q1 (ended November 22), a double-digit sales for a second consecutive quarter. In addition, the company’s comparable sales grew 11% in the month of December and a strong 16.4% in January. These healthy growth numbers indicate that Costco will see another solid double-digit increase in comparable sales in its fiscal second-quarter results.
Our forecast indicates that Costco’s valuation is $384 a share, which is 17% higher than the current market price of roughly $328. Look at our interactive dashboard analysis on Costco‘s pre-earnings: What To Expect in Fiscal Q2? for more details.
(1) Revenues expected to be marginally ahead of consensus estimates
Trefis estimates COST’s FQ2 2021 revenues to be $44.20 Bil, marginally higher than the consensus estimate of $43.78 Bil. In Q1 2021, the retailer’s total revenue increased 17% year-over-year (y-o-y) to $43.2 billion. In addition, its gross margin improved by approximately 0.5 percentage points, driven by the tailwinds of higher labor productivity and lower spoilage for fresh foods (due to higher sales). We expect the company to continue to ride on this growth momentum in Q2 as well.
As far as e-commerce goes, Covid-19 has given Costco a chance to build out its own business. E-commerce revenue grew 50% in fiscal 2020 and climbed another 15% through the first 22 weeks of FY2021. Costco has the lowest markup in the industry which creates an extremely compelling value for members. To add to this, the acquisition of logistics company Innovel Solutions should also help Costco increase its sales of big-ticket items in the years ahead.
2) EPS likely to be ahead of consensus estimates
COST’s FQ2 2021 earnings per share (EPS) is expected to be $2.50 per Trefis analysis, 2% ahead of the consensus estimate of $2.45. In Q1, the retailer’s operating income surged 35% y-o-y, due to lower selling, general, and administrative expenses. Also, Costco’s adjusted earnings per share grew 33% y-o-y to $2.30 (excluding various one-time tax benefits).
For the full-year, we expect Costco’s net margin to decline slightly from 2.5% in fiscal 2020 to 2.4% in fiscal 2021. This coupled with a 10% y-o-y growth in Costco’s revenues, could lead to a rise of $300 million y-o-y in net income to $4.5 billion in 2021. All this, resulting in a possible EPS increase from $9.46 in FY 2020 to around $10.05 in FY 2021.
(3) Stock price estimate higher than the current market price
Going by our Costco’s valuation, with an EPS estimate of around $10.05 and P/E multiple of 38.2x in fiscal 2021, this translates into a price of $384, which is 17% higher than the current market price of over $328.
While COST stock could trade higher post Q4 release, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Walmart vs D.R.Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.