Why Costco Does Not Look So Promising - Analyst Blog
Estimates for Costco Wholesale Corporation (NASDAQ: COST) have been showing a downtrend since the company posted soft second-quarter fiscal 2014 results on Mar 6, 2014. It seems that analysts have become less constructive on this Zacks Rank #4 (Sell) stock's future performance.
This is evident from the movement witnessed in the Zacks Consensus Estimate that tumbled 4.1% to $4.65 for fiscal 2014 and 3% to $5.24 per share for fiscal 2015 in the past 30 days. The downward movement was due to the company's dismal bottom-line performance.
Costco delivered quarterly earnings of $1.05 per share that missed the Zacks Consensus Estimate of $1.17, and also fell 4.5% from $1.10 earned in the prior-year quarter.
Management cited that sluggish sales and soft gross margin in certain non-foods merchandise categories, weaker gross margin across its fresh foods operation and a fall in international profits led to a disappointing bottom-line performance.
However, the warehouse retailer's total revenue climbed 5.8% to $26,306 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $26,589 million. Moreover, comparable-store sales growth decelerated sequentially to 2% in February from an increase of 4% in January.
Costco has delivered negative earnings surprises in the last 4 quarters — 10.3% and 5.9% in the second and first quarters of fiscal 2014, respectively, while 4.1% and 1.9% in the fourth and third quarters of fiscal 2013, respectively.
Moreover, Costco faces stiff competition from Target Corp. (NYSE: TGT) and Sam's Club, a division of Wal-Mart Stores Inc. (NYSE: WMT), which follows a similar business model that pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition may depress sales and margins.
Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful of their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.
A better ranked stock worth considering in the retail sector is Burlington Stores, Inc. (NYSE: BURL) carrying a Zacks Rank #2 (Buy).
BURLINGTON STRS (NYSE: BURL): Free Stock Analysis Report
COSTCO WHOLE CP (NASDAQ: COST): Free Stock Analysis Report
TARGET CORP (NYSE: TGT): Free Stock Analysis Report
WAL-MART STORES (NYSE: WMT): Free Stock Analysis Report
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