Costco Wholesale Corporation Slides on “Just Good” Earnings

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Costco Wholesale Corporation (NASDAQ:COST) has been one of the market’s most reliable, if not biggest, long-term winners going back as far as far as anyone can remember, but COST stock wasn’t exactly on fire headed into Tuesday afternoon’s Costco earnings report.

Costco Wholesale Corporation Slides on "Just Good" Earnings

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While shares were up 10% from their July low, they’re barely up for the year, with investors nervous about the potential impact of a team-up between Amazon.com, Inc. (NASDAQ:AMZN) and Whole Foods Market.

As it turns out, those investors were right to be concerned. While COST stock wasn’t outright obliterated following the post-close release of the company’s fiscal fourth quarter results, shares did suffer a setback of around 1.5%, as the report wasn’t exactly thrilling for a stock that’s been priced for high-octane growth.

Costco Earnings Recap

For the quarter ending August, Costco reported a profit of $2.08 per share and revenue of $42.3 billion versus analyst expectations of $2.02 per share of COST stock and sales of $41.55 billion. The retailer turned $36.56 billion worth of revenue into earnings of $1.77 per share in the comparable quarter a year earlier.

Same-store sales were up 6.1% globally, and higher by 6.5% in the United States. Analysts were only looking for same-store sales growth of 5.2%.

“Good” Is Not Good Enough

Despite the 15.8% year-over-year increase in sales and 17.5% improvement in per-share profits thanks to store openings, investors have been accustomed to stronger growth, particularly in terms of same-store sales progress.

Costco, like rivals Kroger Co (NYSE:KR) and Wal-Mart Stores Inc (NYSE:WMT) — which also operates Sam’s Club warehouses — has been struggling with growing competition from Amazon and other online choices. It’s remained something of a standout for investors, however, as it’s consistently grown the top and bottom lines while other retailers haven’t.

Much of that consistency can be attributed to the membership nature of its stores.

That’s not to say fees, which accounted for $2.6 billion worth of last year’s revenue and $943 million worth of Q4’s top line, are a key part of the revenue tally; they only accounted for about 2% of 2016’s top line. Those pre-paid fees largely ensure loyal patronage though, whereas consumers may not step foot in a Wal-Mart or Kroger on a regular schedule.

There’s also the not-so-small matter that Costco, amazingly enough, offers better prices and lower-cost shipping on many of its goods.

Still, there’s no denying that the company’s revenue and earnings growth pace have been slowing as saturation and tougher competition become an increasingly-painful reality, even if last quarter’s figures looked relatively progressive.

Bret Kenwell explored the metrics of this reality on Thursday. In short, consumers who at one point only held a membership with Costco are increasingly willing to buy memberships into other shopping clubs. What other venues do they like? According to the Cowen report Kenwell dissected, 64% of Costco club members are also Amazon Prime subscribers. That’s up from only 28% in 2013, indicating waning loyalty.

There was nothing in the Costco earnings release to suggest investors have good reason to believe the company’s got firm grip on how to stop, or even slow down, this shift. The conference call scheduled for later on Thursday afternoon, however, may shed more light on the matter.

Looking Ahead for COST Stock

Prior to the company’s release of its fiscal fourth quarter numbers, analysts were collectively calling for earnings of $1.31 per share on sales of $30.43 billion for the first quarter of the new year currently underway. Both figures are up — nicely — from year ago levels. For all of next year the pros were modeling income of $6.43 per share of COST stock and a top line of $135.62 billion, versus last year’s sales of $126.17 billion and profit of $6.08 per share.

Those outlooks are apt to change in the near future, now that last quarter’s numbers are in hand.

Bottom line? Yours truly suggested last week that COST stock was too expensive to own here; its 2017 price implies the company’s growing like it was in 2012. That danger is still a palpable one, judging from the market’s pessimistic response to quarterly results most retailers would be thrilled with.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/costco-stock-slides-on-earnings/.

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