Why Costco Had A Stronger Q1 Than You Think

Although some Wall Street analysts weren't particularly impressed with the earnings report, Kelly Bania of BMO Capital Markets was among those who were encouraged.

BMO's Commentary

In a research report on Thursday, Bania stated that Costco's adjusted earnings per share of $1.17 was in line with her below-consensus expectations. In fact, the analyst believes the quarter was stronger than the headline numbers suggest for two main reasons:

1. First, Bania stated that Costco's interchange fee savings were better than expected in the quarter. The analyst believes savings from the lower interchange fees will represent $0.43 in earnings per share and are tracking ahead of her expectations of $0.16 to $0.33 per share for the full year.
2. Second, the analyst highlighted the fact that a membership fee raise is now more likely given weaker comps.

Accordingly, Bania is adjusting her full-year fiscal 2017 earnings per share estimate to $5.98 from a previous $5.90, and her 2018 estimates were also raised to $6.65 per share from a previous $6.47 per share. Over the longer term, Costco's low gross margin business strategy and its product nimbleness imply the big box store will remain "highly relevant," even in a fast-changing consumer environment.

Shares remain Outperform rated with an unchanged $180 price target.

At last check, shares of Costco were up 3.56 percent on the day, trading at $159.37.