Analyzing Costco’s EPS Drivers and Earnings Outlook




Costco Wholesale (COST) reported earnings per share (or EPS) of $1.24 in fiscal 3Q16, up by nearly 6% compared to the $1.17 reported in fiscal 3Q15. Its EPS growth was driven by higher sales and membership income, as well as expense leverage at the gross margin level. Costco’s gross margin as a percentage of net sales expanded by 34 basis points in the third quarter to come in at ~11.4%.

However, the positive impact of its gross margin expansion was offset somewhat by higher SG&A (selling, general, and administrative) costs. This includes the impact of costs relating to IT modernization, as well as the shift to a new co-branded card, among other factors.

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Share buybacks

Costco’s EPS growth in the first three quarters of the year was also spurred by its share repurchase program. Costco expects to spend ~$0.5 billion on share repurchases this fiscal year. The company has spent $346 million on share buybacks in the first three quarters of the year, at an average price per share of $148.64.[1. Based on comments by Richard Galanti, CFO of Costco]

The company’s share repurchases totaled $136 million in the third quarter. This would imply a fourth quarter outlay in the region of $150 million on share buybacks.

Future outlook

Although Costco hasn’t provided sales (XLP) and EPS growth estimates for the fourth quarter, the Wall Street analyst consensus expects Costco (COST) to grow sales by 4.6% to $37.4 billion in fiscal 4Q16. EPS is expected to come in at $1.77, an expected growth rate of 2.3% year-over-year.

Costco’s rival Walmart (WMT) expects to generate EPS in the range of $0.95–$1.08 in fiscal 2Q17. This implies a year-over-year decline of 12% at the lower end of the guidance range and 0% growth at the higher end of the estimate. Consensus Wall Street analyst estimates project EPS of $1.02 for Walmart in fiscal 2Q17, somewhat in the middle of the company’s guidance range, which implies a decline of 5.6% over fiscal 2Q16.

Kroger (KR), which reports its first quarter earnings on June 16, is expected to see its EPS grow 9.5% in the quarter to $0.69, according to the market consensus. Dollar General (DG) is expected to generate EPS growth of 13.7% in fiscal 2Q17, according to Wall Street analyst estimates.


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