Costco Wholesale Corporation (COST): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

Summary:
Costco continues to be a dominant retail wholesaler based on the breadth and quality of the merchandises it offers. Having delivered consistent comps growth, it is well positioned in the warehouse club industry. Costco’s first-quarter fiscal 2015 results also hint the same, wherein top-line grew 7.4% to $26,866 million, and also came ahead of the Zacks Consensus Estimate. The quarterly earnings came in at $1.12 per share outperforming the Zacks Consensus Estimate by 2.8% and surging 16.7% from the prior-year period. This is the second consecutive quarter that the company has registered positive earnings surprise, after witnessing four consecutive quarters of earnings miss. However, we remain apprehensive if the company adopts aggressive pricing to counter competition, gain market share and drive traffic, as this may depress margins. Currently, we stay Neutral on the stock.

Overview:

Based in Issaquah, Washington, Costco Wholesale Corporation, (formerly Costco Companies Inc.) sells high volumes of foods, and general merchandise (including household products and appliances) at discounted prices through membership warehouses. It is the largest warehouse club operator in the U.S. The company’s warehouses offer an array of low-priced nationally branded and select private labeled products in a wide range of merchandise categories. Costco offers three types of memberships to its customers: Business, Gold Star (individual), and Executive.

As of December 10, 2014, Costco operates 671 warehouses, comprising 474 warehouses in the United States and Puerto Rico, 88 in Canada, 34 in Mexico, 26 in the United Kingdom, 20 in Japan, 11 in Korea, 10 in Taiwan, 7 in Australia and 1 in Spain.

Costco generates revenue from two sources: 1) Store sales and 2) Membership fees and other revenue (MFI). Store sales accounted for 98% of fiscal 2014 revenue with MFI represented the remaining 2%.

Costco offers myriad varieties of food products as well as a vast range of household and lifestyle products, stationeries and appliances. The company also sells gasoline to customers at cheap prices. The company’s products are classified under six broad merchandise categories, namely, 1) Sundries (including candy, snack foods, tobacco, alcoholic and nonalcoholic beverages), 2) Hardlines (including major appliances, electronics, health and beauty aids, hardware, office supplies), 3) Food (including dry and institutionally packaged foods), 4) Softlines (including apparel, domestics, jewelry, housewares, media, home furnishings, cameras), 5) Fresh Food (including meat, bakery, deli and produce) and 6) Ancillary and Other (including gas stations, pharmacy, food court, optical, one-hour photo, hearing aid and travel).

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