Costco’s Second Quarter Is Haunted By Ghost of Christmas Past

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Source: Getty Images

Shares of Costco Wholesale Corp. (NASDAQ:COST) fell as much as 3 percent in early trading on Thursday after the retailer reported underwhelming fiscal second-quarter earnings. Net income fell 15.36 percent to $463 million, or $1.05 per share, missing the mean analyst estimate of $1.17 per share by a fairly wide margin.

The miss, according to Costco CFO Richard Galanti, was primarily the result of a bad start to the quarter. The first four weeks of Costco’s fiscal second quarter (the 12 weeks ended February 16) overlap with the holiday shopping season, which was fairly weak this time around. According to ShopperTrak data, retail sales fell 3.1 percent on the year for the week ended December 22. Data compiled by other organizations report mixed results — the International Council of Shopping Centers showed a 2.7 percent year-over-year increase for the week ended December 21 — but the post-holiday message coming from the market was decidedly negative. Those retailers who managed to post positive sales growth, like Costco, did so at a cost. Retailers were forced to offer deep discounts in order to lure customers through the doors, which suppressed margins and led to net declines in income.

But there was at least one tailwind for income: a 14-cent-per-share ($62 million) tax benefit related to a special cash distribution to the company’s 401(k) plan participants.

The international side of Costco’s business was also unforgiving last quarter. Currency headwinds gouged results, reducing headline international comparable sales growth to zero. Adjusted to exclude the impact of foreign exchange and gasoline price deflation, international sales were up 7 percent for the same period. Costco’s overall sales picture is strong, though. U.S. unadjusted comparable sales growth was 4 percent in the second quarter and adjusted growth was 5 percent. Net sales increased 6 percent to $25.76 billion, beating the mean analyst estimate of $26.65 billion.

Costco wasn’t the only big retailer to suffer last quarter. Wal-Mart Stores Inc. (NYSE:WMT) reported earnings in-line with expectations but sales growth below expectations. Earnings came in at $1.60 per share, beating the mean analyst estimate by a penny, but revenue increased just 1.6 percent, 20 basis points below expectations, and increased to just $128.8 billion for the quarter. The earnings per share figure masks a 21 percent decline in net income that emerged from many of the same problems that faced Costco in the holiday season.

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