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Costco’s Q3 Results Weren’t Impressive: Is It Still a Buy?

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Costco (NASDAQ:COST) posted mixed results for the third quarter of fiscal 2020 after the markets closed on May 28. As expected, lower traffic took a toll on the company’s comparable sales in the third quarter. Also, incremental expenses related to the COVID-19 outbreak pressured the bottom line. Costco stock was down 2.2% in the after-hours.

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Costco’s comps lagged its peers

The company posted total revenues of $37.27 billion in the third quarter, which beat Wall Street’s expectation of $37.13 billion. However, the revenues declined by about 1% YoY (year-over-year). Notably, lower traffic remained a drag.

Costco’s comparable sales growth was below its peers. Investors should note that the traffic declined for most of the retailers, including both Walmart (NYSE:WMT) and Target (NYSE:TGT), due to the COVID-19 pandemic. However, a rise in the average ticket drove comps higher.

For instance, Costco’s comparable sales increased by 4.8% in the third quarter, which reflected a 9.3% increase in the average ticket. However, worldwide traffic declined by 4.1%. In the US, Costco’s comps (ex-fuel) increased by 5.9%. The benefit from the higher ticket size was partially offset by a 2.0% decline in traffic.

In comparison, Walmart’s US comps (ex-fuel) rose 10.0%, which reflected a 16.5% increase in the average ticket. However, the traffic at Walmart’s US business fell 5.6% in the most recent quarter. Meanwhile, Target’s comparable sales increased by 10.8%, which reflected a 12.5% rise in the average ticket.

Costco’s e-commerce sales increased by 64.5% in the reported quarter. In comparison, Target’s comparable digital sales rose 141%, while Walmart’s US e-commerce sales rose 74%.

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Costco’s Q3 earnings missed the estimate

Costco posted an EPS of $1.89 in the third quarter, which was below Wall Street’s estimate of $1.95. The company’s third-quarter earnings decreased by about 8% YoY.

However, investors should note that incremental costs related to the COVID-19 pandemic had a negative impact of $0.47 on Costco’s bottom line in the third quarter. In the third quarter of 2019, the EPS gained about $0.16 from the non-recurring tax item.

In comparison, Target’s bottom line also took a significant hit from incremental costs. However, the bottom line beat analysts’ estimates. Meanwhile, Walmart’s adjusted EPS increased YoY and beat Wall Street’s expectation.

Bottom line

Despite near-term challenges, Costco is my top retail pick. Although the company lags Target and Walmart on the digital front, it’s catching up fast. Recently, Costco acquired Innovel Solutions, which should fortify its last-mile shipping and boost e-commerce sales.

Besides, the company’s continued investment in price will likely continue to attract value and bulk buyers. Costco’s membership base remains strong with a high renewal rate. At the end of the third quarter, the company’s renewal rate in the US and Canada was 91%. Meanwhile, the worldwide renewal rate was 88.4%. As a result, Costco stock is a buy on any pullback.

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