Costco Ekes Out Earnings Growth, Expects Further Expansion

By Markets

The retail space has changed dramatically in recent years, and Costco Wholesale (NASDAQ: COST) has had to work hard to navigate the shifts in what shoppers expect from the retailers they frequent. Between the rise of e-commerce retailers and efforts from big-box retail rivals to recapture some of the business they've lost over the years, Costco has found itself having to defend its turf to find growth opportunities. Coming into its fiscal fourth-quarter financial report on Wednesday night, Costco investors expected earnings to remain flat from year-ago levels, but the retailer managed to squeeze out modest gains and believes that further expansion will be helpful in promoting further growth. Let's look more closely at how Costco Wholesale did and what's ahead for the warehouse retailer going forward.

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Image source: Costco.

Costco boosts its bottom line

Costco's fiscal fourth-quarter report was mixed from most investors' perspective. Revenue climbed 2.2% to $36.56 billion, which was about a quarter billion dollars less than most of those following the stock had expected. However, net income eked out a 2% gain to $779 million, and that produced earnings of $1.77 per share, $0.04 ahead of the consensus forecast among investors.

Looking more closely at how Costco did, the retailer's comparable-store sales figures showed many of the same trends that investors have seen throughout the year. Costco's overall comparable-store sales were flat for the quarter, with a 1% drop in the U.S. offsetting a 2% rise from its Canadian operations. Comps from its other international category dropped 1%. However, when you account for the impact of gasoline price deflation and foreign exchange movements, Costco posted overall comps growth of 3%, including 2% in the U.S, 5% in Canada, and 1% in other international markets.

In addition, some of the most important parts of Costco's business model showed continued success. Revenue from the fees that Costco collects from its members jumped by 6%, matching last quarter's growth and accounting for just about all of the retailer's net income. At the same time, Costco managed to keep the costs of the goods it sold under control, rising less than 2%. A nearly 6% rise in overhead expenses wasn't ideal, but it nevertheless was small enough to keep overall operating expense growth muted and overall profit margin stable.

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What's ahead for Costco?

As we've seen in past quarters, Costco's muted comparable-store sales growth has led it to embrace store expansion efforts to drive overall top-line gains. That continued during the fiscal fourth quarter, with Costco's network now encompassing 715 stores. Ten new locations opened during the period, including eight in the U.S., one in the U.K., and one in Canada. Moreover, Costco said that it expects to open up nine more stores before the end of calendar 2016, further expanding its reach and offering more customers the chance to do business with the warehouse retailer.

Perhaps most importantly to investors, though, is the fact that Costco's switch away from American Express (NYSE: AXP) toward a card using the Visa (NYSE: V) network helped the retailer save on fees associated with payment processing. Costco CFO Richard Galanti said that the fact that it paid less to Visa than it had to American Express helped to offset falling food prices, which held back revenue for Costco. Given some of the difficulties involved in getting the switch away from American Express executed properly, the fact that it actually benefited Costco financially was welcome news.

Costco's results spurred a positive reaction from investors, with the stock climbing 2% in after-hours trading following the announcement. In the long run, Costco remains on its strategic path, and its business model has overcome challenges in the past and should continue to serve the company well looking forward as well.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale and Visa. The Motley Fool recommends American Express. 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.