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Costco Keeps Delivering Solid Growth

By Dan Caplinger - Updated May 31, 2019 at 8:30AM

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Even without lower tax rates, the warehouse retailer still performed well.

One of the biggest adjustments that investors have had to make in 2019 is getting used to not having a big year-over-year benefit from the late 2017 tax cuts any longer. Costco Wholesale (COST 1.24%) was just one of thousands of companies that enjoyed significant bottom-line gains over the past four quarters as a result of lower tax rates, but now, businesses are having to grow the old-fashioned way -- with larger sales or higher margins.

Coming into its fiscal third-quarter financial report, Costco investors were optimistic that the company would be able to get the job done and make shareholders happy about its results. Costco's numbers were good, and even though some investors didn't seem satisfied, the warehouse retailer seems to be on track with consistent execution.

How Costco kept its streak alive

Costco's fiscal third-quarter report was consistent with the performance that investors have come to expect for years. Total revenue climbed 7.4%, to $34.74 billion, accelerating very slightly from past quarters and edging above what most of those following the stock had expected to see. Net income climbed 21%, to $906 million, and earnings per share came in at $2.05, well above the $1.70 per share from the previous year.

Costco logo in red and blue with white spacing.

Image source: Costco.

Some of the gains that Costco saw on the bottom line were due to a one-time tax benefit. However, even if you take out the $73 million positive impact from that item, bottom-line growth came in at 11%, and per-share adjusted earnings topped the consensus forecast among investors.

From a fundamental standpoint, Costco kept seeing trends that were in line with what it's said for the past several months. Comparable sales for the quarter were up 5.5% across the company, with a 7% gain for the U.S. getting offset by weak readings of 1.3% in Canada and 1.7% internationally. Yet the strong U.S. dollar played a major role in holding back Costco's sales outside the U.S. When you adjust to take into account both the foreign currency impact and the effect of gasoline sales, adjusted comps were higher by 5.6% across the company and relatively similar across all three major geographical areas.

Growth in e-commerce has been an essential element of how Costco intends to keep up with rising rivals on the internet retail front, and the company's latest numbers show how it's managed to keep pace in that area. Comps for e-commerce were up 22% from year-ago levels, and even after adjusting for currency and gasoline, comps growth of 19.5% was an encouraging sign of the progress that Costco has made.

If there was a single area where Costco fell short of expectations, it was on the membership fee revenue line. With Costco bringing in $776 million, fee revenue rose just 5% from what it brought in a year ago.

Can Costco keep up the pace?

In order to make up for sluggish growth in fee revenue, Costco has concentrated on keeping costs down, and those efforts have paid off. Cost of sales climbed 7.5% during the quarter, compared to the fiscal third quarter of 2018, and overhead expenses were higher by just 6.8%. Those growth rates weren't all that far behind Costco's revenue growth, but they were lower enough to widen margin figures slightly and have a favorable impact on the bottom line.

Costco once again made incremental progress in expanding the size of its global store network. The company added three new locations in the past three months, bringing its total to 773. The newest locations included one in the U.S., one in Korea, and one in Australia.

Despite Costco's solid results, shareholders didn't seem to be all that excited by the numbers the company put up, and the stock was down about 1.5% in after-hours trading following the announcement. Yet with the warehouse retailer doing such a good job of keeping up its growth pace, even with the tailwinds from tax reform now having faded away, Costco deserves more praise than it seems to be getting from the investing community.

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