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Nomura Previews Costco Q3: Can Retailer Trump Deflationary Trends?

Nomura Previews Costco Q3: Can Retailer Trump Deflationary Trends?

Discount retailer Costco Wholesale Corporation (NASDAQ: COST) is set to report strong numbers when it announces its third-quarter results after the bell on May 25.

Nomura analyst Robert Drbul sees sales to increase 3.9 percent to $26.5 billion, including a 1.0 percent rise in total comps, while the Street expects EPS of $1.22 on revenue of $27.07 billion.

Earnings Preview

The analyst said the company continues to hurt by deflationary trends across the store, including in meat, electronics and gas. However, Costco's higher ASP and margin opportunity in organics business are expected to provide some offset.

Related Link: Retail Earnings Parade Continues: Best Buy, Costco, Sears

Drbul also noted the sequential reduction in the negative hit to Wal-Mart Stores, Inc. (NYSE: WMT)'s U.S. comps from food deflation in the first quarter of 2016 (-60bps) from fourth quarter of 2015 (-100bp).

"We expect strong membership fee income growth to continue, despite the overhang generated by the upcoming credit card transition to Citi/Visa from American Express, with new member sign-ups growing in the +MSD range and renewal rates at a record global high of 88 percent (U.S./Canada steady at 91 percent)," the analyst highlighted.

In addition, Drbul is positive on new Citi/Visa Card deal, as Costco will benefit from lower interchange fees and the improved rewards program that "has strong potential to drive this card to top of wallet for many consumers."

Rating And Expectations

Drbul, who has a Buy rating on the stock, expects 20bps of gross margin expansion to 11.32 percent, led by core merchandise and ancillary business increases. The analyst expects FY16 EPS at $5.45 and FY17 EPS at $6.15, while the Street estimates EPS for FY16 at $5.32 and FY17 at $6.04.

At the time of writing, shares of Costco rose 1.77 percent to $145.09. The analyst has a price target of $185.


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