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Costco Beats Q1 Earnings, Sales Disappoint Wall Street

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Costco Wholesale (COST) reported its earnings for the first quarter of fiscal 2020 after the financial markets closed on Thursday. The company’s adjusted EPS of $1.73 rose about 8.0% YoY (year-over-year) and beat analysts’ forecast of $1.72.

The company’s overall revenues rose 5.6% YoY to $37.04 billion. However, the revenues lagged analysts’ forecast of $37.25 billion. Costco cited the later Thanksgiving holiday as the reason for the lower-than-expected top line. The stock fell 1.2% on December 5. The company reported slower November comparable sales and first-quarter net sales. Costco stock has fallen 1.3% as of 11:07 AM ET today.

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Insights from Costco’s fiscal Q1 earnings  

Higher sales and improved margins drove Costco’s first-quarter earnings. The company’s gross margin expanded by 30 basis points YoY to about 11.05%. The margins benefited from an increase in hardlines, softlines, food, and sundries. However, a decline in fresh foods had a negative impact on the gross margin. The initial operating losses related to the company’s new poultry complex impacted the fresh foods margin. Costco’s operating margin improved by 16 basis points YoY to 2.93% due to the higher gross margin. The increase was partially offset by investments in technology capabilities and higher wages.

Costco’s overall revenues include net sales and membership fees. The company’s first-quarter net sales grew 5.6% to $36.24 billion, while membership fees grew 6.1% to $804 million. The overall comparable sales grew 4.3%. Negative currency fluctuations and gasoline price deflation had an impact of -30 basis points and -40 basis points on the company’s first-quarter comparable sales. Also, the late Thanksgiving holiday this year had an impact of -0.5% on the comparable sales. The late holiday had an impact of 12 percentage points on e-commerce comps.

Costco’s e-commerce comps grew 5.5% in the first quarter of fiscal 2020. The growth was a sharp slowdown on a sequential and YoY basis. The company’s fiscal 2020 e-commerce comps decelerated compared to 19.8% growth in the fourth quarter of fiscal 2019 and 32.3% in the first quarter of fiscal 2019.

Looking at the region-wise performance, Costco’s US comps were up 4.7%, Canada’s comps were up 2.9%, while other international markets generated comps of 3.2%.

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Peer comparison

Walmart (WMT) reported a 3.2% rise in its US comps, while its third-quarter overall revenues grew 2.5% YoY to $128 billion. The company’s US business benefited from a higher market share in food and consumables, including the fresh category. Walmart’s US e-commerce sales grew 41% due to a strong rise in online grocery sales. Sam’s Club comps grew 0.6% and were hit by reduced tobacco sales. Walmart’s international sales increased 1.3%. The company’s adjusted EPS rose 7.4% to $1.16 and beat analysts’ forecast of $1.09.

Target’s (TGT) strong revenue growth and higher margins drove a 24.9% YoY rise in its third-quarter adjusted EPS to $1.36. Analysts expected an adjusted EPS of $1.19. Target impressed investors with a 4.7% rise in its revenues to $18.7 billion and a 4.5% rise in its comps. Enhanced fulfillment services and faster delivery drove a 31% rise in Target’s digital sales.

Analysts’ reaction

Some analysts raised their target price for Costco stock following its earnings for the first quarter of fiscal 2020:

  • RBC raised its target price to $334 from $329.
  • Jefferies raised its target price to $263 from $260.
  • Deutsche Bank raised its target price to $288 from $286.
  • Raymond James raised its target price to $315 from 300.

Costco stock has risen 46% YTD (year-to-date) as of Thursday. The stock ahead of Walmart, which has risen 28.6% YTD. Notably, Costco lags the 93% rise in Target stock. The 12-month average target price of $307.92 for Costco stock reflects an upside potential of about 5%. Currently, 55% or 16 out of 29 analysts have a “buy” recommendation for Costco stock. The stock has a “hold” recommendation from 12 analysts, while one analyst has a “sell” recommendation.

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