Market Overview

Costco Earnings Preview: On Better Footing Than Sam's Club?

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Costco Wholesale (NASDAQ: COST), which recently opened its first store on continental Europe, is scheduled to report its fiscal third-quarter results Thursday, May 29, before the markets open.

The market appears to be getting increasingly optimistic after Costco reported strong growth in sales for March and April. Investors will be looking for its strong business model, market leadership and competent management to result in Costco continuing to outperformed the broader markets.

See also: Tough Retail Earnings Environment

Expectations

Analysts on average predict that Costco will report that its revenue for the quarter increased year-over-year from $24.08 billion to $25.70 billion. Earnings of $1.09 per share are also in the consensus forecast. That would be a rise from a reported profit of $1.04 per share in the comparable period of last year.

Note that the consensus earnings per share (EPS) estimate has not changed in the past 60 days. However, the company fell short of analysts' EPS expectations in the previous three quarters. The miss in the second quarter was by 12 cents per share, or more than 10 percent.

Costco attributed disappointing second-quarter earnings in part to weak holiday sales, weak gross margins in fresh foods and lower international profits. It also said it planned to open 14 new locations in 2014. The share price rose less than two percent in the days following the second-quarter report.

Looking ahead, the EPS forecast for the three months that end in August so far calls for sequential and year-over-year growth on both the top and bottom lines. That consensus EPS estimate also is unchanged from 60 days ago. So far, growth is expected in EPS and revenue for the full year.

The Company

Costco Wholesale operates approximately 650 membership warehouses in North America, the United Kingdom, Japan and elsewhere that offer branded and private-label products in a range of merchandise categories. It also operates gas stations and pharmacies, and it sells its products online.

The company was founded in 1976, and its headquarters are in Issaquah, Washington. It is a component of the S&P 500, and it has a market capitalization of more than $50 billion. Craig Jelinek has been president since February 2010 and chief executive officer since January 2012.

Its main rivals are the Sam's Club subsidiary of Wal-Mart and privately held B.J.'s Wholesale Club. Wal-Mart recently reported disappointing first-quarter results. So did Target, another competitor, due to weakness in its Canadian operations and the consequences of a major data breach last year.

See also: Wal-Mart's Thursday Morning Data Sets Negative Tone For Retailers

During the three months that ended in May, Costco saw several insiders sell shares, recalled some fruit snacks, hiked its quarterly dividend, reported better-than-expected March and April sales, opened its first store in Spain and ranked near the top of a survey on employee pay satisfaction.

Performance

Costco has a long-term earnings per share growth forecast of almost 11 percent, but its price-to-earnings (P/E) ratio is greater than that the industry average. Its operating margin is less than the industry average, and it has a return on equity of almost 18 percent. Its dividend yield is near 1.2 percent.

The number of Costco shares sold short, as of the most recent settlement date, represented about one percent of the total float, even though short interest has been rising since mid-February. At the current average daily volume, it would take more than two days to close out all short positions.

Of the 26 analysts surveyed by Thomson/First Call who follow the stock, eight rate it at Strong Buy and another six also recommend buying shares. A move to their mean price target would represent a gain of less than five percent for shares. That consensus target is less than the 52-week high.

At the close on Friday, shares were down more than two percent year to date. The share price is below the 200-day moving average. Over the past six months, the stock has underperformed the broader markets and Wal-Mart, but it outperformed Target.

At the time of this writing, the author had no position in the mentioned equities.

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Posted-In: Costco Sam's Club Target Wal-MartEarnings News Previews Trading Ideas Best of Benzinga

 

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