Costco beats Wall Street forecasts

The US economy is rebounding one pallet of toilet paper at a time.

By Jonathan Berr May 24, 2012 12:16PM
Image: Grocery shopping (© Corbis)Costco Wholesale (COST), the largest warehouse retailer, reported better-than-expected quarterly results Thursday. This suggests that while U.S. consumers may be stressed by economic uncertainty, they are still willing to buy chocolate cakes big enough to feed a battalion of soldiers.

Net income for the third quarter rose to $386 million, or 88 cents a share, compared to $324 million, or 73 cents, last year. The results topped the 87-cent average forecast of Wall Street analysts. Revenue rose 8% to $21.85 billion.

Shares of Costco, which have barely budged this year, traded up in pre-market action. Costco has more room to run, particularly if the economic rebound doesn't falter too badly. Like Wal-Mart (WMT), shoppers come to Costco looking for deals. As Bloomberg News noted, "Chief Executive Officer Craig Jelinek has been luring customers with low prices on everything from baked goods to gasoline." The difference being that Costco shoppers tend to be wealthier than their counterparts at Wal-Mart.

Whether the momentum will last remains to be seen. Costco recently reported disappointing same-store sales in April. Analysts have a 52-week price target of $86.83 on the stock, about 4% higher than where it currently trades. I, too, am optimistic about the company. 

For one thing, consumer confidence improved last week for the first time in a month. Then there's Costco's value proposition. Though it does not make sense for a single person to buy perishable goods such as milk in bulk, there are bargains to be had for everyone. Costco's prices on food can be orders of magnitudes better than traditional grocery chains.

Costco also offers a huge variety of services, ranging from installing kitchen cabinets to filling prescriptions. Consumers feeling strapped for cash and those looking to make big purchases both have reasons to shop at Costco. People looking to buy enough toilet paper to last them through the Apocalypse also like shopping at the warehouse chain. Costco offers products under its own Kirkland brand that are reasonably priced and of good quality.

The strategy seems to be working. Same-store sales excluding gas prices and currency fluctuations rose 5% for the 12 weeks ending May 6. Gross margin was 10.55% -- the first gain in five quarters. Membership fees rose to $475 million, helped by an increase in rates. Comparable sales rose 4% in the U.S. and jumped 8% internationally. Costco plans to open six new warehouses before the end of fiscal 2012. If business continues to improve, that figure may be too low.

Jonathan Berr is long Wal-Mart. Follow him on Twitter@jdberr.



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