Key Takeaways

  • EPS was $2.14 vs. the $2.42 analysts expected.
  • Revenue beat analyst expectations.
  • Comparable sales growth was faster than what analysts expected.

What Happened

Costco reported mixed financial results for Q2 FY 2021, the three-month period that ended February 14, 2021. EPS missed analysts' expectations by a fairly wide margin. However, revenue exceeded analysts' forecasts and comparable sales grew faster than expected. The company's e-commerce sales were up 75.8%.

(Below is Investopedia's original earnings preview, published March 3 2021.)

What to Look For

Costco Wholesale Corp. (COST), famous for its giant warehouses overflowing with general merchandise, is seeing accelerating earnings and revenue growth during the COVID-19 pandemic. Consumer preferences have shifted amid the pandemic, with shoppers spending more on food, appliances, and home goods at big box store chains like Costco. Consumers are also buying more online, helping to boost Costco's e-commerce sales.

Investors will be watching to see if these trends can continue to drive increases in Costco's top and bottom lines when the company reports earnings on March 4, 2021 for Q2 FY 2021. Costco's fiscal year (FY) ends in August. Analysts expect robust year-over-year (YOY) growth in both earnings per share (EPS) and revenue, albeit at a slower pace than in the previous quarter.

Investors will also focus on Costco's comparable sales growth, a key metric that gauges growth in sales generated by the retailer's stores and digital channels that have been in operation for at least 12 months. Analysts expect comparable sales growth to accelerate compared to the year-ago quarter, though at a slower pace compared to the most recent two quarters.

Costco's stronger earnings and sales growth hasn't been recognized by the stock market. Its shares have dramatically underperformed the broader market over the past year. The stock managed to avoid the worst of the pandemic-induced market crash that took place early last year. It then began to perform on par with the rebounding market from early June to early September, when it started to outperform. That outperformance did not last, however, as the stock reached a peak at the beginning of December and has trended lower ever since. Costco shares have provided a total return of 9.9% over the past 12 months, less than half the S&P 500's total return of 25.2%.

One Year Total Return for S&P 500 and Costco
Source: TradingView.

The stock's downward trend since the start of December has continued despite Costco reporting an acceleration in profit and sales growth for Q1 FY 2021, reported on December 10, 2020. EPS rose 37.9% as revenue grew 16.7% compared to the year-ago quarter. It was the fastest pace of growth for either metric in at least 16 quarters. Costco said that the pandemic helped to fuel strong results in core merchandise categories, primarily fresh foods and foods and sundries, as well as in e-commerce sales.

Costco also posted robust financial results in the prior quarter, Q4 FY 2020. EPS rose 26.4% YOY, the fastest pace since Q2 FY 2019. EPS also bounced back from the third quarter's drop of 7.8%, which was adversely impacted by an increase in incremental wage and sanitation costs related to COVID-19. Revenue was up 12.4% YOY in the fourth quarter. Costco noted that it experienced a significant sales shift to its core merchandise categories during the first half of 2020 due to the pandemic.

Analysts are currently expecting continued strength in Q2 FY 2021. EPS is forecast to rise 15.6% while revenue is expected to grow 12.1% YOY. Both growth rates would be slower than the previous two quarters but still robust. For full-year FY 2021, which ends in August, analysts expect EPS to rise 16.0%, the fastest pace in two years. Annual revenue is expected to rise 10.5%, the fastest pace in at least six years.

Costco Key Metrics
  Estimate for Q2 2021 (FY) Q2 2020 (FY) Q2 2019 (FY)
Earnings Per Share ($) 2.42 2.10 2.01
Revenue ($B) 43.8 39.1 35.4
Comparable Sales Growth (%) 10.5 8.9 5.4

Source: Visible Alpha

As mentioned above, investors will also be watching Costco's comparable sales growth. The retailer, which operates on a membership-based model, defines comparable sales as net sales generated from its membership warehouses and e-commerce websites that have been in operation for over one year. Growth in comparable sales is achieved through an increase in the shopping frequency from new and existing members as well as in the amount they spend per visit. When comparable sales are growing, it's a sign that existing sales channels have not yet saturated the local market nor are those sales being cannibalized by the company's newly-opened stores.

Costco's comparable sales growth from FY 2017 through FY 2020 averaged about 6.9%. The slowest pace in the past four years was 4.1% in FY 2017, and the fastest pace was 9.5% in FY 2018. The two most recent quarters have seen a noticeable acceleration in YOY comparable sales growth. Comparable sales rose 11.4% in Q4 FY 2020 and then 15.4% in Q1 FY 2021, the fastest growth for any quarter in at least four years. Analysts expect that pace to slow to 10.5% in Q2 FY 2021, but it would still be faster than the rate of growth in the year-ago quarter and faster than the average over the past four years. For full-year FY 2021, analysts expect comparable sales to rise 9.3%, the fastest annual pace in three years.