It's not like I want lockstep agreement from the financial journalists of the world. After all, we seem to get that in spades with the Wall Street analysts, who seem to know few words other than "buy." But when a company with a pretty simple business such as Costco (Nasdaq: COST) comes out with its quarterly earnings report, one would think that you would not see the following two headlines in succession:
- "Costco Disappoints on Profit, Stock Falls" (AP)
- "Costco 1Q Profits Up on More Revenue" (Reuters)
Which is it? Well, it's both. It just goes to show what happens when people start to play the expectations game. Costco doesn't really give the chattering class much guidance, which has the benefit of ensuring that the company doesn't really try to play "beat the number." On the other hand, where there is no guidance, you have to endure goofy, tortured statements from folks who "expect that earnings will beat expectations," and whatnot.
Costco had a fine quarter in a fairly unpleasant retail environment. Earnings increased by 21% over last year's fiscal first quarter to $0.40 per share, or $193 million, on revenues of $11.3 billion, itself a 10% increase. The company has had a solid increase in memberships, with a total of 43 million total members, up from 42.4 million just a quarter ago. Clearly the Costco model is continuing to attract consumers.
Since it is a membership-based company, Costco is able to track some things that other retailers cannot. OK, RadioShack (NYSE: RSH) tried to do this years ago, but we all hated giving it our phone numbers, didn't we? In the Costco conference call (accessed courtesy of CCBN), Costco CFO Richard Galanti said that the company had enjoyed both an increase in average customer check (the amount spent) and an increase in visit frequency. The latter point caught my eye, because it's really the membership model companies that are able to track such things -- Costco, BJ's (NYSE: BJ), Wal-Mart's (NYSE: WMT) Sam's Club, and other places such as Bally's (NYSE: BFT) and Blockbuster (NYSE: BBI). The data that these businesses can collect is extremely robust.
The combination of these elements and the currency gains that assisted Costco's rapidly growing international presence, gave the company average same-store sale increases of 7% on top of the 11% gains it enjoyed in the same quarter in 2003. Everywhere we are hearing about the weakness of retail during the holiday season after an anemic fall quarter. Meanwhile Costco blows it up, opening 11 new stores and turning in gonzo earnings and revenue growth even in its seasoned locations.
At the time of this writing, Costco had not yet posted its balance sheet or cash flow statements, which management has pledged to do. Mr. Galanti stated in the call that there would be a decrease of $300 million in long-term debt (already a very small component of Costco's capital structure) that represented a note of that amount that comes due in June 2005, at which time the company will "just write a check for it."
Don't let the confused commentary fool you. This was another strong quarter for Costco. That it seems to be almost alone in this regard in retailing at this point makes its results stronger still.
See also:
And if you haven't seen the recent Forbes article on Costco, it is well worth a read!
Bill Mann owns shares of Costco. He is trying to figure out what to do with the other 4.995 lbs. of a jar of capers he once bought there.
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