Why Costco Is Still a Buy After Earnings

Costco missed earnings expectations on Thursday, but the long term bull case for the company is as strong as ever.

Jun 3, 2014 at 9:58AM

Captura De Pantalla

Source: Costco.

Costco (NASDAQ:COST) delivered lower-than-expected earnings last week. However, the company is still outperforming competitors such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) by a considerable margin, which shows that Costco is a superior player in the industry with rock-solid competitive strengths. The long-term bullish case for Costco is still pretty much intact.

The numbers
Total revenues during the third quarter of fiscal 2014 increased by 7% to $25.8 billion, above analysts' expectations of $25.7 billion for the period. Product sales grew to $25.2 billion, versus $23.5 billion in the same quarter of 2013, while membership fees increased to $561 million, versus $531 million.

Same-store sales during the quarter increased 4% on the back of a 5% increase in the U.S. and a 3% growth rate in comparable-store sales in international markets. Performance was materially better when excluding the negative impact from foreign exchange fluctuations and falling gas prices: Same-store sales in the U.S. grew 6% and international comparable-store revenues jumped by a big 8% during the period, for a total increase of 6% in comparable-store sales excluding negative impacts from gasoline price deflation and foreign exchange volatility.

Gross margin was 10.62% of sales during the quarter, down marginally versus 10.67% of revenues in the same period during 2013. Operating margin declined 10 basis points to 2.9% of revenues, while operating income increased by 2.1% versus the same quarter in the prior year to $737 million.

Earnings per share came in at $1.07, a bit lower than the $1.09 per share Wall Street analysts forecasted on average.

Industry context
Retailers in different categories are going through a remarkably challenging period because of the unusually harsh winter, lackluster consumer spending, and aggressively promotional pricing environment. In fact, competitors such as Wal-Mart and Target are doing considerably worse than Costco.

Wal-Mart reported an increase of only 0.8% in sales during the quarter ended on April 30, while earnings per share declined by 3.5% year over year. Wal-Mart attributed its weakness during the quarter to the particularly challenging industry environment: "Like other retailers in the United States, the unseasonably cold and disruptive weather negatively affected U.S. sales and drove operating expenses higher than expected."

Target is still being hurt by the data breach that affected the company in December, so its performance can't be attributed solely to industry conditions. However, Target´s numbers for the quarter ended on May 3 were really uninspiring. Total sales increased by 2.1% to $17.1 billion, while comparable-store sales in the U.S. declined 0.3% year over year.

Costco was hurt by rising operating expenses during the last quarter, but the company is still doing remarkably well on the sales front, while clearly outperforming competitors such as Wal-Mart and Target. In such a stable and mature industry like discount retail, gaining market share versus the competition is of the utmost importance, since one company's gains are usually the other one's loses.

The future
Customer loyalty is a crucial factor to consider when analyzing a position in Costco. The economy will always have its ups and downs, and Costco will need to increase spending from time to time in order to consolidate its competitive strengths and position itself for growth.

As long as the company is gaining market share versus its peers, investors in Costco will benefit from solid returns in the long term, regardless of the short-term volatility in profit margins.

Fortunately for investors, Costco is actually stronger than ever on that area. The renewal rate was 87.3% during the last quarter on a global basis, while big markets like the U.S. and Canada were even better, with a renewal rate of 90.6% during the period.  

Customers love Costco because of its amazingly low prices and high-quality service. According to data from the American Customer Satisfaction Index, Costco has a score of 84, the highest one in its industry group, and considerably above the score of 80 obtained by Wal-Mart's Sam's Club, perhaps the company´s most direct competitor.

As long as demand remains strong and customers are still loyal to Costco, the company has abundant room for expansion, both in the U.S. and abroad. The rate of growth may vary on a year to year basis, but Costco is still on its way to continue making both customers and shareholders happy over years to come.

Foolish takeaway
Costco's numbers for the last quarter were a bit light on the profitability side, but the company is still doing much better than competitors such as Wal-Mart and Target, which shows that Costco is a superior player among discount retailers. The company's fundamentals are as strong as ever judging by customer loyalty and overall demand, so any dip in Costco as a reaction to earnings could be considered a buying opportunity for investors.

Do you know how to profit from the payments revolution?
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information