Costco Wholesale Corporation (COST) recently posted better-than-expected third-quarter 2012 results. The quarterly earnings of 88 cents a share beat the Zacks Consensus Estimate by a penny, and surged 20.5% from 73 cents earned in the prior-year period.

The increase in the bottom-line was buoyed by a high-single digit growth in the top-line due to improved sales of discretionary items, as consumers seeking discounts started flocking to warehouse clubs.

Let’s Dig Deep

The warehouse retailer’s total revenue, which includes net sales and membership fee, climbed 8.2% to $22,324 million from the prior-year quarter, and handily beat the Zacks Consensus Estimate of $22,072 million. Net sales jumped 8.2% to $21,849 million, whereas membership fee rose 9.2% to $475 million.

Costco’s comparable-store sales for the quarter rose 5%, reflecting a comparable sales increase of 5% both at its U.S. locations and international divisions. The results were favorably impacted by rising gasoline prices but adversely affected by foreign currencies fluctuation.

Excluding the effects of gasoline prices and foreign currencies, Costco’s comparable-store sales rose 5%, with U.S. comparable sales up 4%, while international comparable sales were up 8%.

Costco’s operating income increased 12.1% to $623 million, whereas, operating margin (as a percentage of total revenue) expanded marginally by 10 basis points to 2.8%.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,791 million, long-term debt of $1,373 million, and shareholders’ equity of $12,585 million, excluding non-controlling interests of $598 million.

Let’s Conclude

Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it offers. The company’s strategy to sell products at heavily discounted prices has helped it to sustain growth in beleaguered economic conditions as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. Having delivered consistent comparable-store sales growth, Costco is strongly positioned in the warehouse club industry.

However, Costco faces stiff competition from Target Corporation (TGT) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT), which follows a similar business model that pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition, may depress sales and margins.

Based on the pulse of the economy, we believe that budget-constrained consumers will remain watchful on their spending and look for discounts. Consequently, we could see competitive pricing, compelling products and innovative ways to attract shoppers.

Currently, Costco operates 602 warehouses, including 435 in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, 13 in Japan, 8 in Taiwan, 7 in Korea, and 3 in Australia.

Currently, we maintain our long-term “Neutral” recommendation on the stock. Moreover, Costco holds a Zacks #3 Rank that translates into a short-term “Hold” rating, and correlates with our long-term view.


 
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