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Why Costco Does Not Look So Promising

Published 03/18/2014, 10:16 AM
Updated 07/09/2023, 06:31 AM

Estimates for Costco Wholesale Corporation (COST) have been showing a downtrend since the company posted soft second-quarter fiscal 2014 results on Mar 6, 2014. It seems that analysts have become less constructive on this Zacks Rank #4 (Sell) stock's future performance.

This is evident from the movement witnessed in the Zacks Consensus Estimate that tumbled 4.1% to $4.65 for fiscal 2014 and 3% to $5.24 per share for fiscal 2015 in the past 30 days. The downward movement was due to the company’s dismal bottom-line performance.

Costco delivered quarterly earnings of $1.05 per share that missed the Zacks Consensus Estimate of $1.17, and also fell 4.5% from $1.10 earned in the prior-year quarter.

Management cited that sluggish sales and soft gross margin in certain non-foods merchandise categories, weaker gross margin across its fresh foods operation and a fall in international profits led to a disappointing bottom-line performance.

However, the warehouse retailer’s total revenue climbed 5.8% to $26,306 million from the prior-year quarter, but fell short of the Zacks Consensus Estimate of $26,589 million. Moreover, comparable-store sales growth decelerated sequentially to 2% in February from an increase of 4% in January.

Costco has delivered negative earnings surprises in the last 4 quarters — 10.3% and 5.9% in the second and first quarters of fiscal 2014, respectively, while 4.1% and 1.9% in the fourth and third quarters of fiscal 2013, respectively.

Moreover, Costco faces stiff competition from Target Corp. (TGT) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT), which follows a similar business model that pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition may depress sales and margins.

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Going by the pulse of the economy, we believe that budget-constrained consumers will remain watchful of their spending and look for discounts. Consequently, we could see more competitive pricing, compelling products and innovative ways to attract shoppers.

Worth Considering

A better ranked stock worth considering in the retail sector is Burlington Stores, Inc. (BURL) carrying a Zacks Rank #2 (Buy).

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