During the company’s fiscal second-quarter 2017, Costco Wholesale Corp. (COST, Financial) reported net sales of $29.13 billion, net income of $515 million and diluted earnings per share of $1.17. These results outperformed results from the prior year, suggesting the company has good growth potential for fiscal 2017.
Brief summary of earnings report
The Washington-based wholesale retailer reported strong results for the 12 weeks ending Feb. 12, 2017, including a 6% increase in net sales from the prior-year quarter. February 2017 net sales of $8.92 million outperformed February 2016 net sales by approximately 8%, driven by higher gas price inflation and positive impact from foreign exchange.
Costco operates in three global regions: U.S., Canada and Other International. While total comparable sales increased just 3% quarter-over-quarter, Canadian comparable sales increased the largest with 8% quarter-over-quarter growth. Additionally, Canadian sales grew 10% from February 2016 to February 2017. The Other International segment lagged the other global regions, posting a comparable sales decline of 2% quarter-over-quarter and for the month of February.
As discussed in the company’s earnings call, Costco’s higher sales growth is primarily driven by two factors: the planned increase in the number of U.S. and Canadian stores and the increase in the number of active members. Costco opened four warehouses during the fiscal second-quarter, including two in Tampa, Florida. For fiscal 2017, the company announced 29 new stores, including 14 in the U.S. and eight in Canada. Costco also has planned openings in several international regions, including Japan, South Korea, Taiwan, Australia and Spain.
Costco reported higher numbers of cardholders across the global regions, with higher penetration of Executive Membership around the world. The company also announced a membership price hike effective June 1, 2017: after the existing fees remained level since November 2011, primary membership (Goldstar, Business) fees will increase from $55 per year to $60 per year while Executive membership fees will increase from $110 per year to $120 per year. The 2% return bonus for Executive members will also increase from $750 to $1,000. The higher membership fees (and the higher bonus) will affect primarily Executive members, which make up approximately one-third of the company’s member base and two-thirds of the company’s total sales.
Company has strong financial outlook for 2017
The wholesale retail company has a strong financial outlook, with a financial strength rank of 7, a profitability rank of 8 and a GuruFocus business predictability rank of a perfect five stars.
Even though the company’s operating margin outperforms just 55% of competitors, Costco’s profit margins and returns are close to a 10-year high. Additionally, Costco’s return on equity ranks higher than 84% of global discount stores.
Closing comments
While Costco has historically high price valuations, the company still has a robust business outlook, with a Piotroski F-score of 7 and an Altman Z-score of 5.81. As the company has good earnings potential, Jim Simons (Trades, Portfolio), John Rogers, Paul Tudor Jones (Trades, Portfolio) and John Burbank (Trades, Portfolio) invested in Costco during the quarter ending Dec. 31, 2016.
Disclosure: No positions in Costco.
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