How Will Costco Make Up for Disappointing Earnings?

Costco Wholesale Corp. (NASDAQ: COST) reported fiscal second-quarter 2016 results after markets closed on Wednesday. The big-box club store posted quarterly diluted earnings per share (EPS) of $1.24 on revenue of $28.17 billion. In the same period a year ago, Costco reported EPS of $1.35 on revenue of $27.45 billion. Second-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $1.28 and $28.42 billion in revenue.

Same-store sales rose 3% in the United States during the quarter and were down by 7% in Canada and down 3% in the rest of the world. Combined sales rose by 1%, including sales of gasoline. Excluding gasoline sales and currency translation effects, U.S. same-store sales rose 4%, Canadian sales rose 10% and international sales rose 6%. Combined sales increased by 5%.

Membership fee revenue rose from $582 million to $601 million year over year, but operating income fell by $21 million from $877 million to $856 million.

Merchandise costs rose by about 2.3% and SG&A expenses were also higher by 6.1%. Net income for the quarter totaled $546 million, down from $598 million in the second quarter of 2015.

Because Costco’s net income is typically closely aligned with its membership fee revenue, it is vital for the company to either add new members or raise those fees. Higher costs and expenses would seem to indicate another boost in the membership fee is around the corner.
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We noted Wednesday that shoppers spend more on groceries per trip to Costco than to any other store. That could indicate that the company could also afford to raise prices on some items to pump up both revenues and profits.

The company did not publish any guidance, but consensus estimates for the company’s third quarter call for EPS of $1.27 on revenues of $27.52 billion. For the full 2016 fiscal year, EPS is expected to come in at $5.48 on revenues of $121.67 billion.

Shares closed up about 1.5% on Wednesday at $152.79 and traded down about 2.8% at $148.50 in Thursday’s premarket session. The stock’s 52-week range is $117.03 to $169.73. Shares are up about 3.8% over the past 12 months but down about 5.4% so far in 2016. Thomson Reuters had a consensus analyst price target of around $168.33 before the results were announced. The high price target is $198.00.