Costco Earnings Hampered by Rising Costs

Costco Wholesale Corp. (NASDAQ: COST) reported third-quarter fiscal 2016 results after markets closed on Wednesday. The big-box club store posted diluted earnings per share (EPS) of $1.24 on revenue of $26.15 billion. In the same period a year ago, Costco reported EPS of $1.17 on revenue of $25.52 billion. Second-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $1.22 and $27.07 billion in revenue.

Same-store sales were flat in the United States during the quarter, up by 1% in Canada and down by 2% in the rest of the world. Combined sales, including sales of gasoline, were flat. Excluding gasoline sales and currency translation effects, U.S. same-store sales rose 3%, Canadian sales rose 8% and international sales rose 3%. Combined sales increased by 3%.

Membership fee revenue rose from $584 million to $618 million year over year, and operating income rose by $37 million from $821 million to $858 million.

Merchandise costs rose by about 2% and SG&A expenses were also higher by nearly 6%. Net income for the quarter totaled $545 million, up from $516 million in the third quarter of 2015.

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Sequentially, EPS, same-store sales (excluding gasoline) and membership fees were all flat. Net sales were up 2.5%, but about two-thirds of the improvement was eaten up by higher merchandise costs.

Costco raised its minimum wage for store employees to $13 an hour beginning in March, and that very likely contributed to the higher SG&A total. Keep in mind, though, that SG&A is less than a tenth the company’s merchandise costs. In March, Costco estimated the impact of higher employee wages at about one cent per share in the third quarter and about two cents a share in each of the next three quarters.

There is a reasonable chance that Costco will raise its membership fees early in 2017, if not a little sooner. In 2011 the company boosted its basic fee by $5, and since then membership renewals have been running at around 85% to 90%. A similarly sized increase is not likely to send customers fleeing. Costco’s new credit card deal with Visa is scheduled to begin next month, and that could also help boost memberships.

The company did not publish any guidance, but consensus estimates for the company’s fourth quarter call for EPS of $1.77 on revenues of $37.51 billion. For the full 2016 fiscal year, EPS is expected to come in at $5.32 on revenues of $120.15 billion.

Shares closed up about 1.4% on Wednesday at $144.54 and traded down up by about the same percentage at $146.50 in Thursday’s premarket session. The stock’s 52-week range is $117.03 to $169.73. Shares are down about 1.6% over the past 12 months and down about 10.5% so far in 2016. Thomson Reuters had a consensus analyst price target of around $167.91 before the results were announced. The high price target is $196.00.

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