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Costco Wholesale Corporation (COST) Q4 Earnings Preview: What To Watch?

 October 08, 2013 11:08 PM

Costco Wholesale Corporation (NASDAQ: COST) plans to release its operating results for the fourth quarter and fiscal year ended Sept. 1, 2013, on Oct. 9, 2013. A conference call to discuss these results is scheduled for 7:00 a.m. (PT) that day.

Costco currently operates 634 membership warehouses, including 451 in the United States and Puerto Rico, 85 in Canada, 33 in Mexico, 25 in the United Kingdom, 18 in Japan, 10 in Taiwan, nine in Korea and three in Australia.

The warehouse club business model is based on ultra-low mark-up on products, with the majority of profits generated from membership fees charged to customers. Costco derives more than 70 percent of operating income from membership fees received from its 37 million paid-up members.

[Related -Costco Wholesale Corporation (NASDAQ:COST) Q1 Earnings Preview: Membership Fees Or Bust]

Wall Street expects Costco to earn $1.46s a share, according to analysts polled by Thomson Reuters. The consensus estimate implies an increase of 5 percent from last year's $1.39 cents a share.

Costco has managed to beat Street view in all of the past four quarters, at a rate between 1 and 6 percent. The consensus view remained unchanged in the past 90 days.

Last month, Costco reported fourth quarter net sales of $31.8 billion, an increase of one percent from $31.5 billion in the same period last year. Comparable store sales, a key retail metric, rose 5 percent during the quarter.

The company's solid traffic and membership renewal rates are unique within a space wrought with uncertainty of late. The uniqueness could help Costco post a solid quarterly print. However, investors could focus on forex fluctuations, volatile gas prices, and lapping the benefits provided by the extra week last year could impact both gross profit and SG&A margins.

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Costco reported a strong comp in August (core SSS of 6.0 percent) as solid traffic gains of over 5 percent paved the way for the rebound after a sub-par July period.

"Looking ahead to September, we believe COST likely saw another solid month, led by strong traffic. Specifically, we are forecasting Core SSS of +5.5%, which is in-line with the trailing 12 month average of 5.6%," Deutsche Bank analyst Paul Trussell wrote in a note to clients.

Traffic gains would be close to 4 percent, with the negative impact from FX/gas hampering ticket, as was the case last month. Overall, September will again see solid performance in both Food categories as well as Softlines.

The membership fee income is another key focus in Costco print. Membership growth per store will be solid because comparable traffic growth in the fourth quarter was about 5 percent.

"We estimate membership fee income (MFI) at $730m, 6% above last year, or 12% excluding the extra week last year and FX. This is driven by 4% more stores y/y, 2% new members per store and the final full quarter of accrual from the membership fee rate increase in Nov 2011," UBS analyst Jason DeRise said in a client note.

For the third quarter, Costco reported net income of $1.04 per share, up from 88 cents per share last year. The consensus estimate was for EPS of $1.03. Total revenues rose to $24.08 billion from $22.32 billion last year but came below analysts' estimate of $24.21 billion.

Shares of Costco, which trade 22 times its forward earnings, have gained 12 percent this year. They traded between $93.51 and $120.20 during the past 52-weeks.



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