Fuel Segment, Not Pricing, Cost Costco In Q2

Costco Wholesale Corporation COST reported its second-quarter results significantly short of expectations. The quarter does not seem to represent “a thesis changer,” and the company’s earnings growth outlook “looks good against a challenged retail landscape,” Credit Suisse’s Edward J. Kelly said in a report.

Kelly maintains an Outperform rating on the company, with a price target of $175. He recommended buying shares on a pullback.

Q2 Review

Costco reported its EPS at $1.17, significantly below the consensus expectation of $1.36. Comps grew sequentially, the benefit from the new credit card continued to be strong, and the company announced an increase in the membership fee.

Gross profit dollar growth was disappointing, at 3.7 percent versus Credit Suisse’s estimate of 6.2 percent, the analyst noted. He added, “While the call focused on increased investments in price, which played a small role, the largest issue looks to be a sharp decline in fuel earnings (as prices rose significantly during the quarter) and other nonoperating issues.”

Related Link: Costco's Colossal January Comps Keep It A Top Pick For 2017

Kelly lowered the EPS estimates for 2017 and 2018 from $5.97 to $5.66 and from $6.57 to $6.32, respectively.

Growth Outlook

Although the quarter was weak, Costco’s sales should grow as comps ease, the fuel headwind would likely begin to abate in Q3 and the fee increase and card benefit provides upside for investment, the analyst mentioned.

At last check, shares of Costco were down 4.11 percent at $170.67.