Costco Wholesale Corp. (COST, Financial) reported its first quarter fiscal 2017 earnings, registering earnings of $1.17 and top line of $28.09 billion. The better-than-expected quarterly profit came in on the back of improved store traffic and strong sales of fresh food. In fact fresh food was among the best-performing categories of the warehouse club retailer.
The company has been witnessing its own set of challenges recently, but it managed to satisfy its investors by posting gains in earnings and revenue. Let’s take a closer look at the warehouse specialist’s performance in the latest quarter.
Quarter at a glance
Costco Wholesale posted quarterly net income of $545 million, which translates to $1.24 per share, an improvement of 13% compared with $480 million registered in the year-ago quarter. The retailer’s net sales experienced a growth of 3% year-over-year to $27.47 billion. The company’s revenue increase was supported by the $37 million rise in membership fees and the incremental sales from the eight new stores opened during the quarter. In the U.S., comparable store sales rose 1% over a year earlier.
Costco operates through membership warehouses. The company has a strategy of keeping prices lower on a selection of items belonging to branded categories that sell in massive volumes and generate high inventory turnover. The low price does not earn high margins for the company; Costco earns through high volumes.
Improving comparable sales and rising membership fees
The positive news about Costco’s latest results is that the retailer’s comparable-store sales have been showing improvement over the last few quarters. The company’s overall same-store sales for the quarter rose 1%. The metric would have been better had Costco not suffered from the impact of a strong dollar. While Canada experienced same-store sales growth of 4%, other international markets saw flat performance.
In the domestic market, Costco reported same-store sales gain of 1%. Barring the impact of fuel prices and foreign currency translation adjustment, same-store sales grew 1%, 5% and 3% in the U.S., Canada and the rest of the world, thereby registering an overall comp sales gain of 2%.
In addition to focusing on improving its comp sales, Costco has also been stressing expansion of its network in order to support its revenue growth. During the first quarter, the company opened stores in eight locations, five of which were opened in the U.S. and the rest in Canada. This brings the total numbers of stores to 94 in Canada.
Costco now runs 723 warehouses across nine countries. The company also has its ecommerce website in North America, the U.K. and Taiwan and Korea.
Costco’s long-term success formula is to drive revenue growth through increasing membership fees and gaining from the sales volume of merchandise. While margins earned are thin on its merchandise items, membership fees almost entirely add to the profits of the company. For the first quarter, revenue from fees went up 6% to $630 million. This helped the company compensate for the rise in overhead expenses.
Costco has not given any guidance for the upcoming quarters. However, as per consensus estimate, second quarter earnings is expected to grow 10% and come in around $1.36 per share and the top line is expected to rise 6% and touch $29.8 billion.
Disclosure: I do not hold any position in the stock mentioned in this article.
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