Where Will Costco Go Post-Earnings?

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With shares of Costco (NASDAQ:COST) trading around $113, is COST an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Costco is engaged in the operation of membership warehouses in the United States and Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, and through majority-owned subsidiaries in Taiwan and Korea. The company’s depots receive container-based shipments from manufacturers and reallocate these goods for shipment to its individual warehouses, generally in less than 24 hours. Costco’s typical warehouse format averages approximately 143,000 square feet, where many products are offered for sale in case, carton, or multiple-pack quantities only.

Costco said its fiscal second-quarter profit fell 15 percent as lower international profit, weaker foreign-exchange rates, and poor results from non-foods merchandise categories weighed on the bottom line. The company said the first four weeks of the quarter represented the majority of its earnings underperformance. Shares fell 2 percent in early trading. Costco blamed the lower earnings on weaker sales and profits from certain non-foods merchandise categories, particularly during the four-week holiday season; weaker profits on its fresh foods business; and lower international profits, resulting from the weakening of foreign exchange rates. The company’s sales growth has slowed recently, in contrast to other discount clubs, which have been a bright spot in retail as shoppers seek to save money by buying in bulk.

For the quarter that ended February 16, Costco reported a profit of $463 million, or $1.05 a share, compared with $547 million, or $1.24 a share, a year earlier. The year-earlier quarter included a tax benefit of 14 cents a share. Total revenue rose 6 percent to $26.3 billion. Analysts polled by Thomson Reuters had expected earnings of $1.17 a share and revenue of $26.65 billion. “In our view,” Sterne Agee analyst Charles Grom said, “both the seasonal softness … and fresh-food margins issues (likely higher protein pressure in poultry) will pass, while the recent strengthening of the U.S. dollar could remain a drag.”

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