Costco Wholesale Corporation (COST), a leading U.S. warehouse club operator, posted its fourth-quarter 2012 results on October 11. Here we will discuss the company's scorecard based on the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.
Last Quarter Synopsis
Costco Wholesale Corporation, posted better-than-expected fourth-quarter 2012 results. The quarterly earnings of $1.39 per share beat the Zacks Consensus Estimate of $1.30, and surged 28.7% from $1.08 earned in the prior-year period.
The boost in the bottom-line was buoyed by a double-digit growth in the top-line due to improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs, and rise in membership fees.
The company's total revenue, which includes net sales and membership fee, climbed 14.3% to $32,218 million from the prior-year quarter, and surpassed the Zacks Consensus Estimate of $31,902 million. Net sales jumped 14.3% to $31,524 million, whereas membership fee rose 17.6% to $694 million. eCommerce sales including Costco.com and Costco.ca, surged 14%.
Costco's comparable-store sales for the fourth quarter ascended 5%, buoyed by a 6% and 2% jump in comparable-store sales in the U.S. and international locations, respectively.
(Read our full coverage on this earnings report: Costco Beats on Higher Sales)
Agreement of Estimate Revisions
For the first quarter of 2013, a negative inclination was visible in 4 out of 22 analysts covering the stock lowering their estimates, whereas only 1 analyst raised the same in the last 7 days. However, for the second quarter, a positive attitude was witnessed among 3 analysts who made upward revisions, whereas 2 analysts trimmed their estimates.
Fiscal 2013 portrays a strong positive bias, with 13 analysts moving their estimates upwards, while only 1 analyst lowered the same in the last 7 days. For fiscal 2014, 3 analysts increased their estimates, whereas 2 analysts decreased the same over the same time frame.
What Drives Estimate Revision
Clearly, a positive sentiment is palpable among most of the analysts, who remain optimistic on Costco's performance. Better-than-expected results impressed the analysts, who went on to revise their estimates upwards. Analysts raising their estimates are also counting upon healthy September comparable-sales results, effective cost management, and Costco's rapid club expansion plan. The company plans to open approximately 27 to 30 new outlets during fiscal 2013, after opening 16 new locations in fiscal 2012.
However, some of the analysts remained apprehensive as they remained concerned about erratic consumer behavior, competitive pricing, increase in operating expenses and merchandise margin pressure.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate for the first quarter of fiscal 2013 dropped by a penny to 92 cents a share in the last 7 days. For the second quarter it did not show any movement, and remained constant at $1.06 as the upward and downward revisions in estimates made by analysts neutralized each other.
For fiscal 2013, the Zacks Consensus Estimate jumped 5 cents to $4.49 in the last 7 days. The Zacks Consensus Estimate elevated by 4 cents to $4.96 for fiscal 2014.
Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandises it offers. The company's strategy to sell products at heavily discounted prices has helped it sustain growth amidst beleaguered economic conditions, as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is well positioned in the warehouse club industry.
A differentiated product range enables Costco to provide an upscale shopping experience to its members, resulting in market share gains and higher sales per square foot. Moreover, the company continues to maintain a healthy membership renewal rate. Costco also remains committed to opening new clubs in domestic and international markets. The company's diversification strategy is a natural hedge against risks that may arise in specific markets.
However, Costco faces stiff competition from Target Corporation (TGT) and Sam's Club, a division of Wal-Mart Stores Inc. (WMT), which follows a similar business model that pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition may depress sales and margins.
Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful of their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.
Currently, we maintain our long-term Neutral recommendation on the stock. However, Costco holds a Zacks #2 Rank that translates into a short-term Buy rating.
About Earnings Estimate Scorecard
As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These "Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education