Costco Wholesale handily beat Wall Street’s profit expectations Thursday and posted increased store traffic, but its latest earnings report showed it’s not immune to geopolitical factors such as gyrating oil prices and the growing strength of the U.S. dollar.
Comparable sales — that is, revenue from warehouses that were open last year — grew 8 percent both at home and abroad, when excluding the impact of lower gas prices and foreign-currency somersaults.
That’s a highly respectable number that shows the Issaquah-based retailer is successful at bringing people into its 671 stores more frequently and selling them more goods. Archrival Wal-Mart posted a growth of 1.6 percent in its U.S. operations, excluding fuel sales.
But when factoring in lower gasoline prices, comparable sales growth in the U.S. was halved to 4 percent. And the relative strength of America’s economy is making Costco pay a price when translating its foreign revenues into U.S. dollars: Taking the foreign-exchange impact into account, the impressive growth in international “comps” reversed to a negative 2 percent.
The phenomenon doesn’t tarnish Costco’s impressive operational results, released before the market opened. Investors on Thursday scrambled to buy the stock, boosting its share price by 2.7 percent to $151.17.
But the numbers highlight the unintended consequences of two of the company’s key strategies: its reliance on gasoline to bring customers into the store (gas sales now account for about one-tenth of its revenue), and its slow but steady march to conquer overseas markets. There the company is exposed to elements it can’t control.
Deutsche Bank analysts said this week that while they expect Costco’s fundamentals to remain strong, foreign currency and gas price “head winds” over the next few months will push comparable sales into negative territory, and will stunt earnings per share growth.
So-called gas-price deflation comes as the world is awash in crude — both from the massive amounts unleashed in the U.S. by fracking, and by the decision of the Organization of Petroleum Exporting Countries to keep pumping crude.
Despite taking a toll on revenues, the slide in gasoline prices gave a powerful boost to Costco’s short-term profitability.
The reason is that retail gasoline prices tend to fall more slowly than oil and wholesale fuel prices do, enabling retailers to make more money until prices stabilize.
But now fuel seems to be on the way up once again — a dynamic that tends to make profits made from its sale go down.
Chief Financial Officer Richard Galanti said in an earnings call that Costco doesn’t “expect to see those kinds of outsized gas profits in the next quarter.”
Costco’s net income climbed to $598 million, or $1.35 a share, up 29 percent from the same period last year. Analysts polled by Bloomberg, on average, estimated $1.18 in earnings per share.
“Costco delivered one of its strongest quarters in recent memory,” Charles Grom, an analyst at Sterne, Agee & Leach, said in a note.
Sales in the quarter rose 4.4 percent to $27.5 billion. Revenue from membership fees advanced 5.8 percent to $582 million.
In the earnings call, Galanti said that Costco’s store in Seville, which it opened last year, was “doing great,” and that two new warehouses, planned for the Spanish capital of Madrid, were planned to open in the fall.
He added that Costco is still a year away from opening a warehouse in France.
Information from Bloomberg News is included in this report.
