Don't Count Costco Out Just Yet!

Source: Wikimedia Commons

May 29, 2014 was a pretty boring day for shareholders of Costco Wholesale  (NASDAQ: COST  ) . Despite mixed results for the third quarter of Costco's 2014 fiscal year, shares of the retail giant remained virtually unchanged.

In light of the company's missed earnings but slightly higher revenue, and Mr. Market's reaction to the news, what does this mean for shareholders invested in the company? Is Costco still an amazing prospect going forward, or would the Foolish investor be better off looking to Whole Foods Market  (NASDAQ: WFM  ) or Wal-Mart Stores  (NYSE: WMT  ) instead?

Costco's strong growth was offset by margin pressure
For the quarter, Costco reported revenue of $25.79 billion. In addition to topping the $25.76 billion analysts expected to see, the company's results came in 7% higher than the $24.08 billion management reported for the same quarter last year. According to the company's press release, the 4.5% increase in warehouse count from 627 in the third quarter of last year to 655 this year was a significant growth driver for the business. This was, however, complemented by the 3% increase in comparable-store sales seen in the company's international operations and the 5% jump seen in its U.S. operations.

Source: Costco

While shareholders benefited from higher-than-expected sales, they weren't so lucky on a profitability basis. For the quarter, Costco reported earnings per share of $1.07. Although this represents a 3% improvement over the $1.04 management reported during the third quarter of 2013, it fell shy of the $1.09 Mr. Market hoped to see. Despite seeing rising revenue year over year, the company was negatively affected by slightly higher costs of goods sold and selling, general, and administrative expenses as well as an increase in the number of shares outstanding.

But how does Costco look compared to its peers?
Over the past five years, Costco has done an amazing job growing its business. Between 2009 and 2013, the retailer saw its revenue skyrocket 47% from $71.4 billion to $105.2 billion. One of the largest contributors to the company's top-line growth was its comparable-store sales, which experienced a 28% aggregate increase during this period. However, the Foolish investor can also attribute the company's success to its higher store count, which jumped 20% to 634 locations from 527 five years ago.

COST Revenue (Annual) Chart

Costco revenue (annual) data by YCharts

The company's success in growing revenue puts larger rival Wal-Mart to shame but couldn't quite keep up with the results championed by Whole Foods. Between 2009 and 2013, Wal-Mart reported that its sales increased 17% from $408.1 billion to $476.3 billion as a 35% leap in store count more than offset a tepid 2% improvement in comparable-store sales. Meanwhile, Whole Foods saw its revenue skyrocket 61% from $8 billion to $12.9 billion as the company added 27% more stores and benefited from a 31% aggregate increase in comparable-store sales.

COST Net Income (Annual) Chart

Costco net income (Annual) data by YCharts

From an earnings perspective, Costco did even better. Over its most recent five-year period, the retailer's net income soared 88% from $1.1 billion to $2 billion as higher sales and reduced costs (in relation to sales) had a positive impact on the company's performance. Whole Foods also did well over this period, with its bottom line climbing 275% from $146.8 million to $551 million, while Wal-Mart's 11.5% improvement from $14.4 billion to $16 billion has probably left some shareholders feeling disappointed.

Foolish takeaway
Based on the data provided, it makes sense to some extent why Mr. Market didn't really respond much to Costco's quarterly results. Yes, the business did miss on earnings, but its strong revenue growth is certainly an upside. When combined with how the company has fared over a long-term period, it would probably be a nice prospect for the Foolish investor. However, with its superior metrics over the five-year time horizon, Whole Foods might make for a more Foolish play on retail.

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