Analysts Say Costco Wholesale Corporation Margins Could Be Turning The Corner

Costco Wholesale Corporation's COST wider-than-expected profit margin for its recent quarter could be the beginning of an earnings upturn for the bulk retailer, analysts said Wednesday.

The Issaquah, Washington-based company's results Wednesday exceeded Wall Street's expectations after at least four consecutive quarters in which margins shrank. Its shares traded recently up 2.5 percent to $128.43 per share.

Although same-store sales growth of 7 percent in its fiscal fourth period was strong, a couple of analysts zeroed-in on Costco's improved profit margins.

"We're more optimistic about continued margin expansion ahead," Deutsche Bank's Paul Trussell said.

Recent improvements stemmed from fewer promotions on food, as well as lower costs for meat and produce, according to Trussell, who also pointed to a "smoother run rate" for spending on information technology.

Trussell maintained a Buy rating and raised his target to $135 from $130 per share. But added that a September slow-down in same-store sales to 6 percent from 7.7 percent in August "needs to be watched."

Morgan Stanley's Simeon Gutman thinks the recent period marks the start of an earnings "re-acceleration" for Costco following a period of contracting margins on merchandise.

"The company had been reluctant to fully raise prices on key items, fresh foods in particular" in hopes of retaining customers, according to Gutman, who maintained an Overweight rating on the shares.

But Costco's pattern of being "overly accommodating on pricing may be changing," Gutman said, noting that Costco's fourth-quarter gross margin on sales grew by 14 basis points, and well ahead of expectations.

"Importantly, it didn't seem to come at the expense of sales," according to Gutman. Revenue grew 9 percent in the recent period to $35.52 billion.