OUR TAKE
Costco's Q3 Shines

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By LouAnn Lofton (TMF Bling)
May 28, 2003

Costco (Nasdaq: COST), the country's largest warehouse club retailer, put up some impressive third-quarter results this morning. In contrast to competitor BJ's Wholesale's (NYSE: BJ) dismal first-quarter results from last week, Costco excelled on all fronts, demonstrating again why it's a formidable company.

Costco's total revenues, including membership fees, climbed 11% to $9.54 billion. Net revenues rose by the same percentage to $9.34 billion. Same-store sales for the quarter improved a solid 6%. Its same-store sales are up 5% through the first nine months of its fiscal year, with total revenues up 9% during that same period.

The merchant of everything from mattresses to pastries to freshly cut flowers earned $153.8 million for the quarter ended May 11. That's 18% ahead of last year's Q3 income. Diluted earnings shook out to $0.33 a share, vs. $0.28 last year, and beat expectations by two cents.

Its gross margins widened to 12.41% in the quarter from 11.99% in the prior period. Gross margins were even better for the first nine months of its fiscal year, coming in at 12.50%.  Net margins also expanded during the quarter, to 1.61% from 1.51%.

As has become nearly standard of late for many retailers, Costco's selling, general, and administrative costs rose. SG&A expenses were up 14%, and increased to 9.68% of sales compared to 9.36% last year.

The wholesaler took a $16 million after-tax charge back in its second quarter to shore up its worker's comp claim reserves, but it didn't highlight those costs as a particular problem this time around. By taking the charge when it did, Costco likely saved itself some future trouble.

Costco hopes to keep the party going through its fourth quarter. It will open three new warehouses before its fiscal year ends August 31, and will add 12 before the calendar year's over. It operated 416 stores at the quarter's close.

The retailer expects to earn between $0.54-$0.56 a share in Q4, bringing its earnings for the year up to $1.56-$1.58, and representing annual earnings growth of 5.41%-6.76%. With shares trading at around 23 times earnings, then, investors should carefully weigh just how much of a premium this discounter deserves.

Costco has been featured twice by Tom Gardner in The Motley Fool Stock Advisor.

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