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Costco Celebrates the Holidays as Profit Surges

By Dan Caplinger - Updated Apr 11, 2019 at 8:56PM

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The warehouse retailer enjoyed solid sales growth, as well.

Retailers have been under pressure to adapt to changing consumer preferences, and for Costco Wholesale (COST 1.92%), the threat of e-commerce seems like a bigger concern than it would be for more typical retailers. Given that Costco charges its members for the right to go to its stores and take advantage of its bargains, the warehouse retailer has a strong vested interest in keeping people wanting to visit its locations. Yet that hasn't stopped the company from also taking steps to meet customers on the online front, as well.

Coming into its fiscal second-quarter financial report, Costco investors looked forward to good sales gains and hoped that profits would follow suit. For the most part, the warehouse big-box giant made good on its promise, and many shareholders seem encouraged about what the company's future looks like for 2019.

Costco Wholesale logo in red and blue.

Image source: Costco.

Costco gets the job done

Costco's fiscal second-quarter report was mixed in some investors' eyes, but the bottom line was impressive. Total sales were higher by 7.3% for the quarter, to $35.4 billion, which was just a bit short of the 8% growth rate that most of those following the stock had wanted Costco to deliver. However, net income surged 27%, to $889 million, and that produced earnings of $2.01 per share, well above the consensus forecast among investors for $1.69 per share.

Costco's comparable sales were generally consistent with what the company had already said about the early part of the quarter. For the full period, comps were higher by 5.4% across Costco's businesses, with 7.4% gains in the U.S. but relatively flat performance in Canada and the rest of the world. After adjusting for currency and gasoline prices, however, Costco had much more balanced performance, seeing comps rise 6.7% worldwide. February's numbers were somewhat more sluggish, though, balancing against stronger growth in December and January.

E-commerce has continued to play a key role in Costco's growth. The company said that e-commerce comps were higher by more than 20% during the quarter, and adjusting for extraordinary items like currency, Costco added another 5 percentage points to the growth rate.

Membership fee revenue didn't manage to produce the same gains that the company enjoyed earlier in the year. At $768 million, the figure was higher by just 7% from year-earlier levels, slowing from a double-digit percentage pace during the fiscal first quarter.

Check out the latest earnings call transcript for Costco.

What's ahead for Costco?

Costco argued that it saw headwinds from a couple of key factors. First, weather conditions in the U.S. and Canada hurt February's sales figures by roughly 1 percentage point. Moreover, with Chinese New Year coming earlier in February than it did in 2018 due to the movements in the lunar calendar, negative impacts on Costco's international business were substantial, hitting overall revenue by roughly half a percentage point.

Costco's expansion plans also stayed relatively stable. The warehouse retailer opened two new locations during the period, boosting the size of its overall store network to 535. Both locations were in the U.S. market, which makes up almost 70% of Costco's total store count.

The big question for Costco is how the remainder of the fiscal year will go. Starting next quarter, income tax reductions for the retailer will no longer boost year-over-year comparisons, and that will likely slow down earnings growth dramatically. From there, it'll be up to Costco to figure out how to make up the difference. Efforts to control costs were evident in the retailer's results this quarter, but it's uncertain how much more it can do to keep expenses in check.

Investors were still pleased with how Costco did, and the stock was higher by almost 4% in after-hours trading following the announcement. The warehouse retailer will still have to work hard to defend its turf against the threat of e-commerce competition, but at least for now, signs suggest that shoppers are still loyal to Costco and its traditional way of letting them buy the things they want and need.

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