Costco Wholesale Bucks Lower Gas Prices to Find Profit Growth

By Markets Fool.com


Image: Costco.

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Big-box warehouse retailer Costco Wholesale has been a reliable long-term performer for investors, with consistent growth that shows the beauty of its simple yet profitable business model. Yet coming into Wednesday night's release of its fiscal third-quarter financial report, some Costco investors wondered if the company would be able to keep growing despite some of the headwinds that have hit other retailers lately. Costco's results, though, showed the steps that the company has taken to keep finding profit growth despite its challenges. Let's take a closer look at what Costco said about its most recent quarter and what investors should expect going forward.

Costco shops for bigger profits
As we've seen in previous quarters, Costco's results showed more dramatic gains on the bottom line than on the top line. Total revenue climbed just 1.2% to $26.1 billion, falling about $500 million short of the projections that analysts had made for the company. On the other hand, net income climbed 9% to $516 million, and that translated to earnings of $1.17 per share, topping estimates by a penny.

Beyond all the numbers that most investors pay closest attention to, though, you can see a lot of the factors that are hitting Costco hard right now. If you just look at overall comparable-store sales, Costco reported a 1% decrease for the latest quarter, with 1% growth in the U.S. getting dragged down by a 6% decline in its international markets. Yet the strong U.S. dollar created a huge drag on international results, with adjusted comps rising by 7% overseas. Moreover, even within the domestic market, Costco suffered from falling gasoline prices, with adjusted U.S. comps rising 5% after allowing for negative impacts from gas-price deflation. Investors who follow the stock have seen that impact before, but Costco is likely to experience the same effect all year unless energy markets rebound sharply.

Slightly more troubling was that growth in Costco's key membership fee revenue slowed. The quarter's figure of $584 million was up just 4% from the year-ago quarter, slower than the 6% increase we saw in March. Nevertheless, Costco has done a good job of keeping its costs in check, with merchandise costs climbing just half a percent and with reasonable increases in overhead expenses that contributed to an 11% jump in operating income for the retailer.


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Can Costco keep climbing?
One thing that investors can look forward to later in the year is a return to more dramatic store-count growth. Over the past three months, Costco's network of warehouses grew by just two locations, after remaining unchanged during the quarter before last. Yet the retailer expects to add another 15 new locations between now and the end of August, which hopefully will help alleviate the downward pressure on revenue that slumping gas prices have caused.

Overall, though, Costco has to be pleased with the way that the economic recovery has started to boost its overall results. Even as gasoline prices affect its sales at its proprietary pumps, Costco can take advantage of the fact that customers have more disposable income to spend inside its stores. Moreover, while gasoline is more of a low-margin commodity business, selling more Costco merchandise gives the retailer a chance to take greater advantage of its prowess in paying suppliers as little as possible for the inventory that it sells.

Costco didn't release its results until the after-hours market had closed, so the stock didn't reflect any immediate impact from the numbers. Nevertheless, with earnings coming in better than expected and with signs that growth is continuing to take shape for the retailer, Costco's latest results point to a brighter long-term future that could keep supporting a lofty share price in the months and years to come.

The article Costco Wholesale Bucks Lower Gas Prices to Find Profit Growth originally appeared on Fool.com.

Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Costco Wholesale. The Motley Fool owns shares of Apple and Costco Wholesale. 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.