Costco Climbs on Strong Earnings, But Will Future Growth Keep Up the Pace?

By Markets Fool.com


Costco's Kirkland Signature brand is part of its value proposition. Source: Costco.

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Investors have been reasonably happy with Costco Wholesale lately, as the company that pioneered big-box warehouse retail shopping started to see its sales growth accelerate and shared a big special dividend with shareholders last month. Coming into Thursday morning's release of its fiscal second-quarter financial report, Costco had many wondering whether it could continue to deliver the top- and bottom-line growth that have driven so much of its long-term success over the years. As it turned out, Costco gave investors much of what they wanted to see, with the rise in net income standing out as particularly noteworthy. Let's examine Costco's latest results more closely to see what happened to the retailer over the past quarter and what's ahead for the rest of 2015.

Costco gets a bottom-line boost
Many investors saw Costco's results as mixed, because its revenue fell short of the growth rate that they had hoped for. Overall, sales climbed 4.3% to $26.87 billion, disappointing those who had expected something closer to the consensus estimate for 5% revenue growth. Yet bottom-line progress more than made up for any perceived sales shortfall, with net income climbing 29% to $598 million. Even after backing out one-time items, including a tax benefit that boosted its bottom line, adjusted earnings came out to $1.25 per share, or $0.07 above what most investors were expecting to see.

Perhaps the biggest surprise about Costco's results is just how much gasoline sales affect the company's overall sales. Comparable-store sales for the quarter came in up just 2%, which was much slower than the 5% growth in comps from last quarter. Yet when you take out gasoline price drops from the company's results as well as the impact of foreign exchange movements on its international sales, Costco's comps soared to 8% for the quarter, topping last quarter's growth by a percentage point. That combination of headwinds hit Costco's international results especially hard, causing 10 full percentage points of downward pressure on comps for the international business.


Membership fees drive huge profits for Costco. Source: Costco.

Costco continues to benefit from its membership model. Income from membership fees rose almost 6% to $582 million, and while that amount makes up only about 2% of Costco's overall revenue, it comes almost entirely as profit for the company, helping to allow the retailer to accept lower margins from its merchandise sales. The impact of that high-margin revenue is clear, as it essentially represented nearly 100% of Costco's net income.

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Is more growth ahead for Costco?
It seems likely that Costco will keep seeing the same trends persist well into the future. In its February results, which extend a couple of weeks beyond the end of its fiscal quarter, Costco saw flattish comps growth of just 1%. But incorporating gasoline and currency impacts, comparable-store sales soared 8%, with even stronger 12% growth in its international markets.

Still, the pace of Costco's growth remains somewhat in question. The retailer didn't see any change in the number of warehouse stores it operates during the quarter, remaining at 671 systemwide.

The AmEx relationship with Costco is coming to an end. Source: American Express.

For now, everyone seems focused on the company's change in how Costco manages its credit card business, having made the switch from a formerly exclusive deal with American Express and instead going with banking rival Citigroup . The value of the deal for card companies is clear, as AmEx got hammered hard on the news while most expect Citigroup to see some huge benefits. As a result, it's reasonable to conclude that Costco should see some financial benefits from the partnership, and the greater prevalence of Visa-backed cards could help Costco boost its business somewhat as well.

Costco investors were pleased with the results, bidding up shares by about 1.5% in pre-market trading following the announcement. In order for Costco stock to keep climbing, though, it will have to go beyond special dividend payments and new credit arrangements to keep delivering membership growth and greater sales from its existing customer base. With high hopes for the future, Costco investors will need to keep an eye on the company to make sure it keeps up with their expectations.

The article Costco Climbs on Strong Earnings, But Will Future Growth Keep Up the Pace? originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends American Express, Costco Wholesale, and Visa. The Motley Fool owns shares of Citigroup Inc, Costco Wholesale, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.