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These Factors Could Pose Challenges for Costco in Fiscal 2Q16

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Analyzing Costco’s performance in fiscal 2Q16

Costco Wholesale (COST) reported sales of almost $50 billion in the 22 weeks ending January 31, 2016. That’s a 2% increase compared to the $49 billion it reported in the comparable period of last year. In the months of December 2015 and January 2016, Costco reported net sales of $12.5 billion and $8.3 billion, respectively. That represents an increase of approximately 3% in December and 2% for January over the comparative period one year previously.

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Warehouse sales wilted in winter storms

Comparable warehouse sales came in up 1% in December 2015 but remained flat in January 2016. However, excluding the impact of foreign currency movements, and gasoline price deflation, comparable warehouse sales (XLY) were up by 5% in December and by 4% in January.

According to Jeffrey Elliot, Costco’s Associate Vice President of Finance, severe winter weather in the Northeast and the Midwest affected US sales in January by one percentage point and overall company sales by 0.75 percentage points. This factor will dampen Costco’s sales growth in fiscal 2Q16.

This factor is also likely to affect the results of other US-based retailers like Five Below (FIVE) and Tuesday Morning Corporation (TUES) though not Florida-based Publix Supermarkets (PUSH).

Forex factors

While Costco’s (COST) international operations represent a good long-term opportunity, results in fiscal 2Q16 are likely to be subdued. The appreciation of the US dollar versus local currencies in some of Costco’s biggest markets is likely to be the elephant in the room.

Costco operates 90 locations in Canada. The retailer derived 14.9% of total sales and 21.3% of its operating income from Canada in fiscal 2015. Costco’s sales are likely to continue feeling forex (foreign exchange) pressures in fiscal 2Q16, negating the impact of positive sales growth trends. Canada comps were down 9% in December, and 6% in January, compared to normalized comps of 9% and 11%, respectively. By comparison, Walmart’s (WMT) same-store sales in Canada were up by 4.3% in constant-currency terms.

Now let’s take a closer look at Costco’s profitability in fiscal 2016.

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