Costco Wholesale Corporation (COST, Financial) revealed its second quarter earnings report for FY2015 with the company’s earnings surpassing consensus estimates for the third successive quarter. For Q2 2015, Costco reported a 19% growth in adjusted earnings to $1.25 a share compared to the prior-year quarter, comfortably beating the consensus estimate figure of $1.17 a share. Inclusive of certain tax benefits, the company’s quarterly earnings stood at $1.35 a share, indicating a significant rise from the year-ago quarter’s figure of $1.05 a share. Following the results, Costco shares rallied to $151.75 a share during the day’s trading and settled at $151.17 at closing bell.
Memberships, In-Store and Online Sales Boost Revenue
Costco reported total revenue, including net sales and membership fee, of $27.45 billion in Q2 2015, up 4.4% from the prior-year quarter. The figure, however, fell shy of the consensus estimate of $27.57 billion. The warehouse retailer posted 4.3% growth in net sales to $26,872 million during the quarter and a 5.8% growth in membership fee to $582 million. Costco’s net income for the second quarter stood at $598 million or $1.35 per diluted share. Although the company’s net income saw a negative impact amounting to $14 million in tax charges related to an ongoing income tax issue, the impact was more than offset by a $57 million tax benefit related to a special cash dividend in February 2015.
Costco’s current operation of 671 warehouses includes 474 locations in the US and Puerto Rico, 88 locations in Canada, 34 in Mexico, 26 in the UK and 20 in Japan. The company saw a 2% growth in both same-store and comparable-stores sales during the quarter. Although foreign currency headwinds and lower fuel prices resulted in a 2% fall in international sales and limited growth in the domestic market to 4%, the company logged 8% growth in comparable-store sales in both the US and abroad excluding the impact of these factors. While Costco’s operating income grew 21.1% to $877 million compared to the prior-year quarter, operating margin expanded to 3.2%, up 40 basis points.
In terms of Costco Online, the company saw 23% growth in sales during the second quarter, with comparable-online sales in the U.S. growing 23% and comparable-online foreign sales climbing 20% on a local currency basis. Costco also reported a strong renewal rate in memberships, with the renewal rate in Canada and the US averaging 91%. At the same time, the company’s average renewal rate in the international market stands at 87%-88%. The company also logged 9% growth in new memberships during the quarter.
The Road Ahead
Costco’s upbeat second quarter results, despite foreign currency headwinds and lower gas costs, is due to the company’s diversification strategy that offers a natural hedge against risks arising in specific markets across the globe. However, the retailer, which pushes through high merchandise volumes at reduced prices in membership-only warehouse clubs, faces stiff competition from Wal-Mart’s (WMT, Financial) Sam’s Club and Target Corp. (TGT, Financial) that follow a similar business model. Aggressive pricing in order to drive traffic and capture a greater market share are likely to negatively impact the company’s sales and margins. At the same time, Costco bought back 642,000 shares worth a total of $92 million at an average price of $143.21 a share, instilling investor confidence in the company. Experts foresee the company’s average annual earnings grow at the rate of 11.3% of the next five years, with a steady growth in earnings per share through fiscal 2015. Consequently, the Costco stock currently carries a ‘buy’ guidance.
