Costco Earnings Dive on Weak Holiday Buying

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Costco Wholesale Corp. (NASDAQ: COST) reported second-quarter fiscal 2014 results before markets opened Thursday. The big-box club store posted diluted earnings per share (EPS) of $1.05 on revenue of $26.31 billion. In the same period a year ago, Costco reported EPS of $1.24 on revenue of $24.87 billion. The results also compare to the Thomson Reuters consensus estimates for EPS of $1.17 and $26.65 billion in revenue.

The company noted that EPS a year ago benefited from a gain of $0.14 related to a cash dividend paid to Costco’s 401(k) plan participants. But the company still missed the EPS estimate by a mile and the revenue estimate by more than $300 million. The CFO said:

Despite satisfactory sales results during the second fiscal quarter, several other factors led to lower earnings. These factors included: weaker sales and gross margin results in certain non-foods merchandise categories, particularly during the four-week holiday selling season; weaker gross margins in our fresh foods business; and lower reported international profits, resulting from the significant weakening of foreign exchange rates. The first four-week period of the quarter represented the majority of earnings underperformance in the quarter.

Costco’s second quarter runs from mid-November to mid-February and the fact that the holiday season was the worst month of the quarter could simply indicate that the store had the wrong stuff on the shelves, or maybe something more serious is going on. For the 12-week quarter, same-store sales in the United States were up 4%, including gasoline sales, and up 3% including the company’s international stores, gasoline and the currency exchange rate impact. Excluding gasoline and negative currency exchange rates, U.S. and total same-store sales rose 5%.

For the four-week period ending March 2 Costco’s same-store sales including gasoline and currency exchanges totaled 3% in the United States, negative 1% internationally and 2% combined. Excluding gasoline and exchange rates, U.S. sales rose 4%, international sales rose 5% and combined sales rose 4%.

The company did not publish any guidance, but consensus estimates for the current quarter call for EPS of $1.14 on revenues of $25.92 billion. For the full fiscal year, EPS is expected to come in at $4.84 on revenues of $112.84 billion.

Shares were down about 0.2% in premarket trading Thursday morning, at $116.25 in a 52-week range of $101.01 to $126.12. Thomson Reuters had a consensus analyst price target of around $123.00 before the results were announced.