Costco's Earnings Show Promising Outlook

Everyone's favorite wholesaler Costco (Nasdaq:COST) released earnings on Thursday and showed that even the American consumer is beginning to spend more on everyday items, even if it's just "doormats or housewares". Many were curious as to how the Issaquah, Washington-based retailer would fare in its most recent quarter coming off a disappointing second quarter, but news was good across the board.

IN PICTURES: Learn To Invest In 10 Steps

Costco's Glowing Quarter
The wholesale giant grew revenue by 12% to just under $17.8 billion, while growing earnings by a whopping 25% from the same quarter last year when adjusting for items. Net income came in at 66 cents per share excluding items, up from 53 cents last year, meeting analyst estimates in the process.

Same-store sales were also extremely strong, up 10%, buoyed by an increase of 26% in international markets, while U.S. store sales were up 6%. Excluding gas prices and dollar appreciation the comps come in at 4%. Also, membership dues, which account for a large portion of the firm's operating profits were up 20% for the quarter, a sign that stores are seeing a large increase in foot-traffic and a broadening of Costco's appeal. CFO Richard Galanti echoed this sentiment during the conference call when he stated "I think if there is a silver lining to this horrible economy over the last year and a half, it is that the warehouse clubs and us in particular, are the extreme value proposition ... people are shopping with us more frequently than they used to."

Outlook
Management also noticed that the company saw increased revenues from not only retail consumers but small-businesses (namely restaurants) as well, which added to Costco's success in its food business. They did point out, however, that although customers are coming in more often, average spending per visit dropped marginally, which may just be a tradeoff to the increase in visits. Galanti sees great opportunity in this statistic, stating: "My view is we've got them coming in more frequently, and it is not like they're buying it somewhere else. And when they start buying it, they are buying it at us." Something that is tough to refute, since Costco boasts extremely high customer "stickiness" due to its membership programs.

Competition
There were some concerns coming into the earnings announcement that rivals Sam's Club (NYSE:WMT) and BJ's Wholesale (NYSE:BJ) were stealing market share from Costco through aggressive discounting and increased marketing, especially in the case of Sam's Club which is a subsidiary of Wal-Mart. Even Target (NYSE:TGT) has become a chief rival for discounters during its strong run over the past 15 months. While earlier this month BJ's raised its full year outlook. Costco's inability to top estimates in the past few quarters didn't do anything to quiet the doubts.

Bottom Line
Many look to the retail industry as a bellwether of how consumers are feeling about their prospects and the economy as a whole. The results by the discount retailers this month have been strong across the board and suggest that consumers are beginning to spend again - even if it is just on a new coffee machine here or there. (For more, see Look To Semiconductors For Earnings Growth.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!