On Thursday evening Costco (COST) released the firm's fiscal third quarter financial results.
For the three month period ended May 7th, Costco reported an adjusted EPS of $3.43 (GAAP EPS: $2.93) on revenue of $53.648B. The revenue print (inclusive of both sales and membership fees) was good enough for year over year growth of 2%, but not good enough for Wall Street, falling short of consensus view. That $0.50 adjustment was made for a non-recurring charge due to the firm's discontinuation of its charter shipping activities. The adjusted earnings print did beat Wall Street.
As revenue grew 2%, the cost of merchandise increased 1.7% to $47.175B as administrative costs increased 7.7% to $4.794B. This actually pushed operating income down 6.2% to $1.679B, falling short of estimates. After accounting for interest and taxes, net income attributable to shareholders printed at $1.302B (-3.8%). Remember, all of this is less that $0.50 per share impairment charge. That's about $298M pre-tax.
Comparable Sales
For the period reported, Costco reported underwhelming company-wide comp sales growth of 0.3%. This includes a print of -0.1% in the US, and -1.0% in Canada, but growth of 4.1% elsewhere. The e-commerce business showed some serious backtracking, and printed at -10% from the year ago period. Once adjusted for the impacts of currency exchange rates and the fluctuating price of gasoline, these numbers look a bit better.
Adjusted comp sales for the fiscal third quarter, for the total company showed growth of 1.6%. Once adjusted, comp sales growth goes positive in both the US and Canada to 4.9% and 1.6%, respectively. That means that elsewhere, that comp sales growth drops to 1.6%. Once adjusted, e-commerce sales growth improves to -7.8%.
Fundamentals
I don't love it when firm's either do not publish all of their key financial tables with their earnings release. or make certain items tough to find. I can not find Costco's statement of cash flows. As far as I can tell, it's not in what they filed with the SEC and it's not present at some other websites that I use to find such things when I can not on my own. It appears looking at past quarters, that Costco typically files this report on their 10-Q several days after releasing everything else on their 8-K.
Turning to the balance sheet, Costco ended the period with a cash position of $13.708B and inventories of $16.324B. This puts current assets at $34.289B. Current liabilities add up to $31.708B, leaving the firm's current ratio at 1.08, which is acceptable. Of course, omitting inventories would leave a quick ratio of little more than half of that. Given that this is a warehouse style retailer, we do not harp on this item too much as the business is, by nature, inventory reliant.
Total assets amount to $66.752B. The firm makes no entry for goodwill or any other kind of intangible assets. While we appreciate this, in this case, the brand name alone probably holds significant value. Total liabilities less equity comes to $43.179B. This includes long-term debt of $6.497B, which the firm could pay twice over out of pocket if need be. There is no short-term debt on the balance sheet. This balance sheet is in fine shape.
Wall Street
Since these earnings were released last night, I have come across nine sell-side analysts that have opined on COST and are rated at a minimum of three stars (out of five) by TipRanks. After allowing for changes, all nine of these analysts have "buy" or buy-equivalent ratings on Costco with an average target price of $552.44 with a high of $590 of Deutsche Bank) and a low of $535 twice (Simeon Gutman of Morgan Stanley and Justin Kleber of Robert W. Baird). Once omitting the high and one of these lows as potential outliers, the average across the other seven drops to $549.57.
My Thoughts
There is no doubt that Costco is well managed, and that is their strength. Another strength is their value proposition as a warehouse retailer that requires a membership fee. This differentiates Costco from its competitors... Walmart (WMT) , Target (TGT) and in a way... Amazon (AMZN) . That said, this is a tough environment. We know that the consumer has been cooling a bit (though maybe not in April after this morning's Income and Outlays report). So, performance has stalled somewhat. Comp sales have sputtered in unadjusted terms, which is the real world.
Costco, by virtue of an economy that we think is slowing, but keeps not really slowing all that much, should do well in a tougher climate. That said, I hold shares in TJX (TJX) and Dollar Tree (DLTR) for those reasons. TJX has moved sideways. DLTR got its tail kicked on Thursday. That may not paint the best short to medium term picture for Costco. The company could use the extra revenue that an increase in membership fees would produce, but has been reluctant to go there. A special dividend is no longer being talked about and really is no longer appropriate.
The stock does pay a regular dividend of $4.08 annually, which sounds great, but is really a yield of just 0.84%. In addition, the stock remains sort of expensive at 33 times forward looking earnings. Walmart, which is also well run, trades at 23 times. Target, which has become with every quarter, seems more and more of a train wreck in progress, trades at 16 times.
That said...
We do have a closing symmetrical triangle on our hands. This set-up can often produce a violent move, up or down, in a stock price. Zooming in...
Readers will note that COST is up today, but perhaps stalling at the confluence of its 21 day EMA (exponential moving average), 50 day SMA (simple moving average), and 200 day SMA. All three of these moving averages reside between $493.79 and $494.61.
Should the stock retake and hold this spot today or soon, swing traders will be brought on-board as portfolio managers are forced to increase long side exposure. Should the stock fail here, resistance will strengthen. I would rather pay $494 to $495 after the level has been taken than pay $493 to $494 ahead of the event should this resistance stiffen.
P.S. - I added to my DLTR long overnight. We've got a gap to fill.
(COST and AMZN are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
