Costco Membership Growth In The Spotlight

COST is set to report earnings after the market close on Wednesday May 25, 2016 and analysts are expecting earnings to come in at $1.22 a share on $27.12 Billion in revenues. Many traders and investors will have COST on close watch as its trading behavior is normally very favorable for strong, volatile moves on catalysts or significant events such as earnings.

Nomura, the Asian based financial powerhouse, had the following comments on COST.

In 3Q, we expect sales to increase 3.9% to $26.5bn, including a +1.0% total comp sales increase. The company continues to be negatively affected by deflationary trends across the store, including in meat, electronics, and gas; however, we note 1) Costco’s higher-ASP and margin opportunity in organics (~$4bn business growing >20%;~15% gross margin vs. 11% avg. for the total company) and 2) the sequential reduction in the negative hit to WMT U.S. comps from food deflation in 1Q16 (-60bps) from 4Q15 (-100bp). We expect strong membership fee income growth to continue, despite the overhang generated by the upcoming credit card transition to Citi/Visa from American Express (NYSE:AXP), with new member sign-ups growing in the +MSD range and renewal rates at a record global high of 88% (U.S./Canada steady at 91%).

With regard to the CC transition, while the deal took longer than anticipated to finalize, we believe the upcoming switch (new Citi/Visa Card will be effective for use June 20) will be positive for two key reasons: 1) Costco will benefit from lower interchange fees and 2) the improved rewards program has strong potential to drive this card to top of wallet for many consumers. We expect gross margin strength to continue in 3Q and forecast 20bps of expansion to11.32%, led by core merch. and ancillary business increases. We expect the SG&A rate to deliver 20bps to 10.29% in3Q, in part due to ongoing IT modernization spend (limited impact post FY16). Our forecast incorporates wage increases in U.S./Canada (effective Mar; $0.01 EPS hit). FY16E EPS at $5.45; FY17E EPS at $6.15.

Costco Wholesale Corporation (Costco), incorporated on May 12, 1987, is engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain, and through majority-owned subsidiaries in Taiwan and Korea. As of August 31, 2014, the Company operated 663 membership warehouses. The Company’s average warehouse is approximately 144,000 square feet. The Company’s warehouses generally operate on a seven-day, 69-hour week. The Company’s product categories include Food, Sundries, Hardlines, Fresh Food, Softlines, Ancillary and Other.

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The Company’s online business provides products, which include services, such as photo processing, pharmacy, travel, business delivery, and membership services. Net sales for online business were approximately 3% of consolidated net sales.

The Company competes with Wal-Mart’s Sam’s Club, BJ’s Wholesale Club, Target Corporation (NYSE:TGT), Kohl’s Corporation (NYSE:KSS), Amazon.com (NASDAQ:AMZN), Lowe’s, Home Depot (NYSE:HD), Office Depot Inc (NASDAQ:ODP) PetSmart (NASDAQ:PETM), Staples, Kroger (NYSE:KR), Trader Joe’s, Whole Foods Market Inc (NASDAQ:WFM), CVS, Walgreens, and Best Buy Co Inc (NYSE:BBY).

Written By: Warrior Trading