Consumer spending in the U.S. has been pretty slow. However, it did show signs of improvement when it inched up by 0.1% in February, as compared to a drop of 0.2% in January. Thus, higher income and lower gasoline prices have shown results. This is expected to get better in the months to come.
Therefore, big box retailers and grocers are benefiting from the growing demand. Even the warehouse retailers witnessed rising sales since customers are willing to spend on their necessities and make the most of their bulk purchases. Costco Wholesale Corporation (COST, Financial) reported an impressive second quarter very recently. The numbers were ahead of the Street’s estimates, sending its shares higher.
Behind the numbers
Revenue for the quarter was up 6.4% to $27.45 billion, over last year. This was slightly lower than the analysts’ estimate of $27.65 billion. The top line failed to meet the expectations primarily because of a decline in the gas prices, which led to lower sales. However, same store sales grew 2% during the quarter. It actually grew by 8%, excluding foreign currency fluctuations and lower gas prices.
Comparable store sales grew 4% in the U.S. and were mainly affected by the decline in gas prices. Excluding gas, comp sales increased 8%. Similarly, International comp sales rose 8%, excluding the effects of foreign currency fluctuations.
Membership fees jumped to $582 million from $550 million in the prior year. This should further increase as the new deal with Visa and Citicorp should add new members to its portfolio.
Margins also expanded due to leveraging labor costs and falling gas prices. Thus, the bottom line surged 29% to $1.35 per share, over last year. This was higher than the analysts’ estimate of $1.18 per share. The retailer managed to register higher earnings because of lower taxes. Taxes were levied at a rate of 30.2% versus 35% in the prior year. This tax benefit was because of the special dividend provided by the company. Thus, the warehouse retailer benefitted by $0.13 per share as it paid $2 billion as cash dividends. Moreover, lower gas prices also resulted in higher profits for the company.
Better than the peers
Costco is the second largest retailer and faces stiff competition from rival Walmart (WMT, Financial). Walmart’s Sam’s Club is based on a similar business model as that of Costco. However, Walmart registered a growth of 1.5% in same store sales, much lower than that of Costco.
Now what
Costco is now eyeing a new credit card to drive customer traffic. American Express (AXP, Financial), which initially had a deal with the warehouse retailer, lost the agreement. The company now plans to partner with Citigroup (C, Financial) and Visa (V, Financial), which will be effective from next year. Thus, customers having Visa credit cards will be benefited.
Such co-branded credit card deals have resulted in higher demand for many retailers. Thus, Costco too is expected to attract more customers. Moreover, Costco is looking for a better deal for its customers, than trying to make more money. Hence, the new deal should help in its long-term growth.
Conclusion
Costco Wholesale Corp has a unique membership based model, wherein the members have to pay a fee for which they can enjoy huge discounts on their shopping bills. This has been a win-win model for both the customer and the retailer. The customers save on their monthly bills, whereas the company gets a steady source of membership revenue. Further, the new credit card deal will attract more loyal customers. Although its results were slightly affected by currency fluctuations this time, lower gas prices should continue to boost its bottom line. Therefore, this seems to be a good buy.
