(costco.com)
Investors didn't seem very pleased with Costco Wholesale's (COST 0.71%) second-quarter performance. But if you ignore Wall Street expectations, then Costco's second-quarter numbers are actually impressive, especially given the current economic environment.
Results without expectations
Costco's second-quarter earnings per share came in at $1.05 versus an expectation of $1.17. And revenue came in at $26.3 billion versus the expectation of approximately $26.6 billion. This is why investors weren't pleased with the quarterly results.
Those headlines might not impress most people, but it's important to note that revenue improved 5.8% year over year. Additionally, comps (same-store sales) increased 3%. Breaking down the comps performance, U.S. comps increased 3%, and international comps came in flat.
Costco blamed its "subpar" results on weak sales in certain non-food merchandise during the holiday period, soft margins in fresh foods, and suffering international profits due to the impact of foreign exchange. The latter can immediately be excluded as a long-term factor since foreign exchange rates fluctuate. Soft margins are a negative, but as long as there is demand, quality management can fix margins. And given the fact that revenue and comps both improved for the quarter, there is an indication that demand is solid.
If you look at more recent and specific performance, comps in February improved 2% year over year, with U.S. comps increasing 3%. However, international comps slid 1%. What's interesting here is that if you exclude gas-price deflation and foreign exchange, international comps actually grew faster than domestic comps in February, to the tune of 5%. U.S. comps "only" grew 4%.
Costco competes with Target (TGT 0.48%) and Wal-Mart Stores (WMT 0.60%), and the comps performances of its peers indicate that Costco is still likely to remain the best investment option of the three. At least that's the case if you're looking for growth and potential stock appreciation as opposed to dividends.
Best of the big box
Target is still dealing with the effects of the data breach. In fact, an important sentence was written in its fourth-quarter press release: "At this time, the [c]ompany is not able to estimate future expenses related to the data breach." Investors don't like uncertainty. Therefore, this is a near-term negative. On the positive side, Target recently invested $100 million on improved technology for data protection purposes. But this will likely take a long time to pay off, and Target's fourth-quarter comps slid 2.5% year over year -- not inspiring.
As for Wal-Mart, if we exclude fuel, then fourth-quarter comps declined 0.4%. This isn't nearly as poor as Target, but it still shook Wal-Mart investors somewhat. Wal-Mart can handle a 0.4% comps decline given its massive cash flow generation; its cash flow allows the company to return capital to its shareholders in a generous manner. Wal-Mart currently yields 2.6%.
To break down Wal-Mart's comps performance, Walmart U.S. comps slid 0.4%, and Sam's Club comps declined 0.1%. If you look at the bigger picture -- for the 53-week period ending Jan. 31 -- comps also declined 0.4%. However, while comps slid 0.6% for Walmart U.S., Sam's Club comps increased 0.7%.
It's a mixed bag for Wal-Mart, but as long as cash flow generation is strong, dividend investors will be pleased. Wal-Mart might not impress investors in the near future since it's investing heavily in e-commerce and its smaller-box stores, but these are two potential growth avenues for the massive retailer.
The point here is that while Target and Wal-Mart should be OK over the long haul, they don't compare to Costco right now. Despite Costco having missed expectations, it's still outperforming its peers.
The Foolish takeaway
Costco's subpar second quarter can be looked at as an investment opportunity, not a reason to panic. When comps numbers begin to turn negative domestically and internationally, then Costco's growth phase will have ended. But that time doesn't seem likely at any point in the near future.
