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Costco Builds Momentum on Early Holiday Strength

By Dan Caplinger - Updated Dec 15, 2017 at 3:13PM

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Find out why shareholders of the retail behemoth should be pleased with its results.

The holiday shopping season is an important one for retailers, and Costco Wholesale (COST -2.73%) is one of the first companies to provide a firm reading on how the holidays have gone. Thanks to the unusual way in which it manages its fiscal year, the quarterly results that it just reported included the prime Thanksgiving holiday shopping weekend, and that promised to show whether the decision earlier this year to boost the amount of annual membership fees that it charges customers would pay off.

Coming into Thursday's fiscal first-quarter financial report, Costco investors were optimistic about the retailer's prospects, pointing to early sales results that suggested strong performance. Bottom-line numbers were equally impressive, and that was exactly what shareholders wanted to see going as year-end shopping hits its peak. Let's take a closer look at how Costco Wholesale did and what's ahead for the retailer.

Costco logo with four bottles of Kirkland vitamins underneath it.

Image source: Costco.

Costco gets a big sales bump

Costco's fiscal first-quarter report sustained the momentum that it had built in previous periods. Total sales were up 13% to $31.8 billion, beating by a slight margin the 12% rise that most investors realized. Net income of $640 million climbed by a healthier 17% from year-ago levels, and even after taking out the positive impact of a favorable tax benefit, adjusted earnings of $1.36 per share were $0.02 better than the consensus forecast among those following the stock.

Costco was careful to break out the impact of the timing of the Thanksgiving holidays in providing fair comparisons between this year and last. This year's quarter actually had one less sales day in the U.S. market, and so when you balance out those effects, Costco said that the upward boost to revenue this year was about 1.5 percentage points in the U.S., with a slightly smaller impact worldwide.

Overall, comparable sales figures were good. Raw comps jumped by double-digit percentages, with higher gas prices and favorable foreign exchange impacts helping to boost Costco's results. Even after taking those effects out, total comps at Costco were up 7.9% during the quarter. The U.S. market outperformed with gains of 8.7% in comps, while the Canadian market lagged with comparable sales figures of only half that rate. The other international segment was also solid. Costco reported very strong e-commerce comparables of 42% excluding currency impacts.

Costco also kept reaping the rewards of its midyear membership fee increase in 2017. Fee-related revenue climbed almost 10% to $692 million, again account for more than Costco's entire net profit all by itself.

Store growth slowed somewhat during the quarter, with the retailer adding just five new stores to bring its total count to 746. Four of those new stores were in the U.S., while the fifth was in the Canadian market.

Can Costco keep up its success?

One issue that Costco investors will want to watch closely is how the retailer controls its expenses. Costs of goods sold rose at a very slightly higher clip than net sales, and a nearly 10% jump in overhead expenses caused operating margin figures to fall by a slight amount. Higher interest expense also weighed on bottom-line growth slightly, and a rising interest rate environment could keep that trend moving in the wrong direction into the future.

The pick-up in e-commerce comps shows the effort that Costco has put into building up its digital presence. New delivery options include both its Costco Grocery two-day delivery service on non-perishable food orders of more than $75, with a selection of 500 products included in the offering. Alternatively, customers can get access to same-day service through a Costco partnership with Instacart, which is offered through nearly 400 U.S. locations and about 1,700 dry and fresh product options. Although Costco would prefer to have customers come to its stores in order to benefit from ancillary shopping along the way, it recognizes the need to meet its shoppers on their terms.

Investors were generally pleased with Costco's report, and the stock climbed about 1% in after-hours trading immediately following the announcement. With things going well early in the holiday season, Costco has started its new fiscal year on the right footing and sees plenty of opportunities for growth ahead.

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