Costco Wholesale Corporation (COST +2.93%) released its quarterly earnings report on May 27. The results were largely dubbed "disappointing" by analysts and the stock fell following the announcement.
It's true that Costco posted a rare deterioration in a key metric, same-store sales, which it hasn't done in several years. But before investors go into panic mode, a great deal of context is necessary. The last quarter was a rough one for most retailers, due to some common headwinds that hit the sector broadly. These include brutal weather, lower gas prices, and tempered consumer spending. None of these challenges are specific to Costco.
Meanwhile, Costco's core business remains extremely healthy, and that's what Fools should keep their focus on.
Context is key
First, the details: Costco earned $1.17 per share in diluted earnings on $25.5 billion in total sales. EPS and total revenue grew 9% and 1%, respectively, on a year-over-year basis. Clearly, Costco is still growing, which is admirable considering the tough overall environment for retail last quarter. But these results weren't good enough for Wall Street, as analysts expected $26.6 billion in revenue. Costco did, however, beat analysts' EPS estimates.
More worrisome for analysts was that Costco reported a 1% decline in comparable sales, which measures sales at stores that were open for at least one year. This was the first time the retailer reported falling comparable sales since 2009, which has many analysts worried.
But I believe Wall Street is simply overreacting.
Focus on what really matters
First, foreign exchange and lower gas prices held back Costco's sales growth. Excluding both these factors, Costco's comparable sales would have increased 6% last quarter, which is excellent growth for a retailer as large as Costco. While the effects from the rising dollar and lower oil prices are having a tangible effect, it's nevertheless a great sign that underlying activity remains strong, and I believe that's a better gauge of Costco's health.
Aside from that, it's clear that Costco's business model is extremely strong. Its solid results are driven by its hugely successful membership program, which continues to attract customer loyalty. Membership fees rose 4% year over year last quarter, and Costco's renewal rate stood at 91% in the United States and Canada, and 88% worldwide.
Another clear sign of Costco's strength is the fact that it is aggressively returning a lot of cash to shareholders. The company recently raised its quarterly dividend by 12%, paid a $5 per share special dividend in February, and also recently authorized a new $4 billion share buyback plan through April 2019. These are not the actions of a company in financial trouble.
Plus, Costco's stock had already rallied considerably heading into its earnings results, so a small decline after reporting is hardly cause for alarm. Shares are up 23% in the past 12 months, which handily beats the 10% return generated by the S&P 500 Index in the same time.
Coming into earnings, Costco was valued at 30 times earnings, a consequence of rising expectations among analysts who cover the stock. Perhaps analysts simply got too aggressive with their projections -- but that's completely outside of Costco's control.
Don't bet against Costco
Costco's quarterly results were only a disappointment in the sense that expectations were too high. The company can't control gas prices or what happens to the U.S. dollar. What Costco can control is its underlying business, which remains very healthy. Underlying comparable sales grew at a solid rate, as did overall earnings per share.
Costco remains highly profitable, and returns a lot of cash to shareholders. Long-term Costco investors have been richly rewarded, and because of its sound membership-driven business model, this should continue for a long time to come.
