Although Costco Wholesale (COST) provided minimal information in its fiscal third-quarter earnings release, there are still ways to quickly assess the quarter before the company holds its conference call.
And this snap assessment is important in a market that is fast to pummel consumer stocks. While headlines initially read that Costco reported a so-so quarter thanks to the broader consumer spending slowdown in April, I believe too much attention on that misses the point regarding the warehouse giant's performance. Barring a disastrous earnings call, Wall Street's viewpoint on Costco's quarter has the chance to become more upbeat.
Here is what I liked:
Share repurchases: Ahead of the catalyst in June on the transfer to Visa (V) cards from American Express (AXP) for members, I like that Costco took advantage of weakness in its stock to buy back more in the market, vs. what it did in the preceding quarter. Costco is a ridiculously stingy organization -- from how it operates its stores to how it delivers news to investors and media to how it uses its cash-rich balance sheet. So when I see the company more excited about its stock price, I get a little more excited, especially in front of the major credit card catalyst.
Relative performance in the U.S: Costco is valued at a premium to its peers based on a track record of outperforming other retail concepts. Despite the spending slowdown this spring, the company once again lived up to that expectation. Same-store sales in the U.S. rose 3%, outperforming a paltry 0.1% rise at Walmart's (WMT) Sam's Club and even the 1.2% increase at Target (TGT), which tends to have similar clientele in terms of income. In a retail environment that continues to be laden with negative surprises -- from bad sales misses, such as Macy's (M), to brutal outlooks like the one from Gap (GPS) -- much can be said about a Costco growing sales (off tough comparisons) and growing them faster than peers.
Inventory: Compared to the prior year, Costco's inventory was relatively unchanged. With department stores reporting higher-than-planned inventory and Target warning that its sales may be hurt this quarter due to widespread industry discounting as a result of elevated inventories, it's refreshing to see Costco manage its inventory very effectively. The read here is that Costco dealt well with its own spring sales slowdown, and won't have to be discounting products aggressively in the summer. Costco's team, once again, proves it knows what the heck it's doing.
Canada: The region, which has seen some retail sales weakness due to the rout in oil prices, has quietly been a strong performer for Costco. It mystifies me that nobody talks about the dominance of Costco in Canada (and more broadly, overseas), which is Costco's second largest, at 90 warehouses. Same-store sales spiked 8%. For some perspective, Walmart Canada reported a 6.7% comp increase, lagging Costco. That said, both retailers would have loved to snag TJ Maxx's (TJX) results in Canada during the quarter, which surged 14%.