Costco Posts Good Earnings

Shares of Costco (COST) have been in a blistering rally since last August. This is probably a good indication of the strength of the consumer (or at least, employed consumers).

The stock recently broke $70 per share. It reached its all-time high in May 2008 at $75.23. Today this company reported decent earnings. The company earned 71 cents per share which was two cents more than the Street was expecting. Margins continue to expand as profits rose by 17% while sales rose by 11%.

Costco has lifted sales since the recession by luring bargain-hungry consumers to pay for membership, which lets shoppers and small businesses buy discounted goods including groceries and televisions. Membership increased 3.6 percent to 58 million in the year through August, and fee revenue rose 10 percent to $416 million last fiscal quarter.

“The quarter continued the theme of modest gross margin expansion, strong membership fee growth and execution on curtailing expenses,” Brian Sozzi, an analyst for Wall Street Strategies Inc. in New York, said in a note to clients.

Costco fell 46 cents, or less than 1 percent, to $69.18 at 10:13 a.m. New York time in Nasdaq Stock Market trading. The stock rose 18 percent this year before today, while competitor BJ’s Wholesale Club Inc. gained 44 percent. Wal-Mart Stores Inc., the world’s largest retailer and operator of wholesaler Sam’s Club, climbed 3.1 percent in 2010.

Membership Fees Up

Costco’s gross profit, or income after cost of goods sold, as a percentage of total revenue rose to 12.9 percent from 12.8 percent. Selling and administrative costs as a portion of revenue dropped 0.2 percentage points.

Sales at stores open at least a year, excluding fluctuations in gasoline prices and currency exchange rates, rose 5 percent, Costco said. Sales advanced 10 percent at the company’s 157 stores outside the U.S. and 4 percent at its 425 locations in the U.S. and Puerto Rico.

Total revenue, including membership fees, rose to $19.2 billion from $17.3 billion a year earlier, the company said. Analysts predicted $18.8 billion, the average of 16 estimates.

In many ways, this story is a like a microcosm of the broader economy. The earnings report is good and Costco’s stock has performed well over the past several months, but it seems like the margin-expansion story is hitting a wall. Gross profit margins aren’t even expanding any more, and SG&A can only be cut so much.

The message is clear: For Costco and others to continue to grow, they need to see top-line growth. More sales means more consumers which means more employed consumers.

Posted by on December 8th, 2010 at 11:15 am


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