Costco Wholesale Corporation (NASDAQ:COST) has looked like a tired security, with COST stock less than two months removed from its all-time high of near $170 per share.
A poor July sales report had investors expecting the worst, as Costco prepared to announce fourth-quarter earnings today, Sept. 29.
Analysts were expecting earnings of $1.73 per share on revenues of $36.7 billion for the fourth fiscal quarter, which ended in August. Analysts were poised for disappointment, with many holding bearish options with plans to profit on them when the number came out.
Instead, the warehouse giant reported earnings of $779 million, or $1.77 per share of Costco stock, on revenues of $35.7 billion. Revenue was short of expectations, but profits exceeded them. For the full year, earnings came in at $2.4 billion, $5.37 per share fully diluted, on revenue of $116.2 billion.
A gain in U.S. sales was offset by lower sales in Canada, although the company hastened to note that, absent gas, merchandise sales were up 4% overall.
COST stock rose about 2% in after-hours trading, catching the bears by surprise.
Deflation Hurts Costco
Like other grocers, such as Kroger Co (NYSE:KR), Costco is being hurt by declining food and low gas prices. Egg, meat and dairy prices are all down, hurting gross sales, and gasoline is no longer the boost to results it used to be.
The shares traded below $148 on the day before earnings, with some analysts (including this one) raising an alarm over the small homes of millennials, and others seeing increased competition with Amazon.com, Inc. (NASDAQ:AMZN).
Like Amazon, Costco’s warehouses rely on paid members to drive growth. While 14.9% of U.S. households are Costco members, up from 9.8% three years ago, 16.2% are now Amazon Prime members, up from 7.1%. Some 11.3% belong to both.
What analysts were more worried about, however, was how much sales might be hurt by Costco’s switch from taking American Express Company (NYSE:AXP) credit cards to a Visa Inc (NYSE:V) card, with membership credit cards offered by Citigroup Inc (NYSE:C). COST wrested a good deal for members from Citi on the cards, which offer discounts of up to 4% on travel and 3% on gasoline, in the form of Costco merchandise. Members get 2% off on Costco purchases with the card, as they did with AmEx. Even at the food court.
What Comes Next for COST Stock?
What may come next from Costco is a hike in membership fees, which currently start at $55, and double to $110 for “executive members” with the cash-back credit card.
The question of a hike matters to analysts because COST stock generates $2.5 billion from them, and its net income came to $2.35 billion. Essentially, the company runs at breakeven and generates profits from the fees.
Costco also is working to slowly expand its online presence, and recently signed a deal with Ticketmaster to sell discounted concert tickets at a site called Costcotickets.com. It was made possible when Ticketmaster, a unit of Live Nation Entertainment, Inc. (NYSE:LYV), opened its application program interface to other companies last year.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he was long COST.