How Costco Plans to Offset Falling Profit

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When Costco Wholesale Corp. (NASDAQ: COST) reported fiscal 2017 second-quarter results after markets closed on Thursday, the big-box club store posted quarterly diluted earnings per share (EPS) of $1.17 on revenue of $29.77 billion. In the same period a year ago, Costco reported EPS of $1.24 on revenue of $28.17 billion. Second-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $1.36 and $28.33 billion in revenue.

Costco also announced a $5 increase to its annual membership fees for primary members and a $10 annual increase for its executive members. Effective June 1, primary memberships will cost $60 and executive memberships will cost $120. The company said the fee increase will affect 35 million members, about half of whom pay for executive memberships.

The company’s profits are driven by membership fees. After-tax net income of $515 million (down 5.7% year over year) failed to meet expectations due to rising costs. That’s the story behind the increase in membership fees.

Membership fee revenue rose from $603 million to $636 million year over year (up 5.5%) in the quarter, and operating income fell by $12 million from $856 million to $844 million.

Merchandise costs rose by $1.46 billion and SG&A expenses were up by about $145 million. Net income for the quarter totaled $779 million, up from $767 million in the fourth quarter of 2015.

Same-store sales rose 3% in the United States during the quarter, rose 8% in Canada and fell by 2% in the rest of the world. Consolidated same-store sales, including sales of gasoline, rose 3% year over year. Excluding gasoline sales and currency translation effects, U.S. same-store sales rose 3%, Canadian sales rose 2% and international sales rose 3%. Combined same-store sales increased by 3%.

For the month of February, U.S. same-store sales rose 5% and 10% in Canada, and they fell 2% in the rest of the world. Consolidated same-store sales rose 4% in February. Excluding sales of gasoline and foreign currency translation effects, U.S. sales rose 2%, Canadian sales rose 2% and international sales fell 1%, yielding a combined year-over-year increase of 2%.

Pretax net income for the quarter slipped slightly from $841 million to $809 million.

The company did not publish any guidance, but consensus estimates for the company’s third fiscal quarter of 2017 call for EPS of $2.02 on revenues of $40.47 billion. For the full 2017 fiscal year, EPS is expected to come in at $5.91 on revenues of $127.03 billion.

Shares closed up less than 0.1% on Thursday at $177.98 and traded down by about 4.4% in Friday’s premarket session. The stock’s 52-week range is $138.57 to $178.71. The consensus 12-month price target was $178.81 before results were announced. The high price target is $200.00.