It's like some kind of an event. Towards the end of every earnings season, the retailers straggle (or should I say struggle) in. Then, towards the tail end of those retailers, comes perhaps one of the most important of them all... Costco ( COST) , a company so well managed relative to the rest of the world it exists in, as to make it hardly comparable. A company also, though, that so much more is expected of, and for that reason, a higher valuation is awarded to by investors that it becomes its own competition.
Let us proceed.
For Costco's fiscal second quarter, which ended February 12, the company posted GAAP EPS of $3.30 on revenue of $55.266B. The earnings print beat Wall Street expectations and was representative of $1.466B in net income. That was up 12.9% year over year.
The top-line print, however, while good enough for year-over-year growth of 6.5%, did fall short of Wall Street's expectations. That revenue number was the product of $54.239B in net sales (+6.5) and $1.027B in membership fees (+6.2%), as both of those components disappointed very slightly.
Comp sales across the entire company were up 5.2%, or 6.8% adjusted. Broken down, these comps were +5.7% in the U.S. (+5.8% adjusted), +3.5% in Canada (+9.6% adjusted) and -9.6% in e-commerce (-8.7% adjusted). Adjustments in all cases above exclude the impacts of gasoline prices and foreign exchange.
Turning to the statement of income/operations, merchandise costs increased 6.4% to $48.423B, leaving gross profit at $6.843B (+7.1%). This was a slight beat as gross margin ex-membership dues improved from 10.45% to 10.72%. Administrative costs increased 8% to $4.94B. This put operating income at $1.903B, which was up just 5% and a slight miss of what had been projected. Operating margin fell from 3.5% to 3.4%.
Balance Sheet
Costco ended the quarter with a cash position of $13.705B and merchandise inventories of $16.081B. Over six months, cash is up, as inventories are down. Current assets in aggregate are up to $34.33B. Current liabilities add up to $32.516B, bringing the company's current ratio to 1.06. Bear in mind that of those current liabilities, $2.412B is in the form of deferred membership fees, which do not represent a financial obligation at all.
Total assets amount to $66.848B. Costco makes no entry on the balance sheet for any intangibles, which we find quite admirable. Obviously, the brand name alone would be worth something. Total liabilities less equity comes to $44.049B. Of that, $6.506B is in long-term debt, which it could pay off out cash twice over if need be.
This balance sheet is in fine shape.
What Wall Street Thinks
Since Costco's earnings were released Thursday night, I have found seven sell-side analysts are rated at four stars or greater by TipRanks that have opined on COST. There were quite a few analysts of lesser grade who also opined, but four stars is where we made our cut.
All seven of these analysts rate COST as a "Buy" or as their firm's buy-equivalent. The average price target across the seven is $562.14, with a high of $610 (Corey Tarlowe of Jefferies) and a low of $535 (Peter Benedict of Robert W. Baird). Once we omit the high and the low as potential outliers, the average target across the other five drops to an even $558.
Unanswered Questions
Costco did not directly address the ideas of increasing membership fees as that line runs directly into profitability, nor did it comment on the idea of paying out a special dividend, which is something that the company has done roughly every two years over the recent past. Costco has not paid a special dividend since November 2020, but has not hinted at doing so anytime soon.
My Thoughts on Costco
I still think Costco is the best-managed big-box retailer, bar none. Heck, that's where I shop. I think as the economy gets tougher on the middle-class consumer later this year, that this kind of consumer will flock to their local Costco locations to buy what they need in bulk at a fair price.
My problem with this company is its valuation. That's why I have not been long Costco for some time. Trading at 33 times forward-looking earnings, with sales struggling to grow, the stock is expensive, in my view. Walmart ( WMT) trades at 22 times and Target ( TGT) trades at 19 times. Now, these two names are not in Costco's class, but Walmart is improving, and I think still expensive at 22 times.
I believe Costco will probably announce an increase in membership fees. Maybe later this year. That's just an opinion. The stock will move on that. I am less sure that the "next" special dividend is in the works going into a more uncertain macroeconomic backdrop. The company's cash may be better served in some other corporate capacity. They probably could just increase the regular dividend and save some money overall while giving shareholders something to cheer about.
Looking at chart, above, Costco appears to be mired in a nine-month-long basing period that's starting to look a bit like a descending triangle. That's a bearish pattern, although this one seems to be moving in slow motion. The real test will come at $447 support, and we are nowhere near that level at this point. I am not motivated to purchase equity in Costco at this time.
If I were long the name already, I think that I would be motivated to go out to June 16 and write $520 calls against the position for a roughly $10 premium. That said, I think getting short a $440/$420 June 16 bear put spread for a net $4 credit sounds more appealing right now than buying stock on this dip. Just my opinion.
(COST is a holding in the Action Alerts PLUS member club . Want to be alerted before AAP buys or sells this stock? Learn more now. )
