Costco continues to shine, gain market share; Will investors buy the dip?

Costco Wholesale Corporation (COST) recently announced its earnings report for the second quarter of fiscal year 2024, exceeding analysts' expectations. The company's solid performance and growth indicate its ability to navigate the uncertain operating environment successfully. Shares slipped lower as yesterday afternoon was full of "sell the news" earnings reports (See AVGO and MRVL). The stock is finding support at $750 and is marching higher in early trade following another solid jobs report. 

Despite the ongoing challenges, Costco demonstrated strength in its sales performance and high membership renewal rates, boasting approximately 132 million members. These factors position the company as a share gainer in the highly competitive retail industry.

COST reported Q2 earnings for the fiscal year 2024 on Thursday after market, with earnings per share (EPS) of $3.71, excluding a $0.21/share tax benefit due to the deductibility of the $15/share special dividend to the extent received by 401(k) plan participants. This was $0.09 better than the consensus of $3.62. Revenue rose 5.7% year/year to $58.44 billion, missing expectations. We would note that the company pre-announces revenues on a monthly basis, therefore the top line figures are not as important when the company posts quarterly earnings. 

Net sales for the quarter increased by 5.7%, to $57.33 billion, from $54.24 billion last year. Net sales for the first 24 weeks increased by 5.9%, to $114.05 billion, from $107.68 billion last year. Net income for the quarter was $1,743 million, $3.92 per diluted share, compared to $1,466 million, $3.30 per diluted share, last year. This year's second quarter net income was positively impacted by a $94 million ($0.21 per diluted share) tax benefit due to the deductibility of the $15 per share special dividend to the extent received by 401(k) plan participants. Net income for the first 24 weeks was $3.33 billion, $7.49 per diluted share, compared to $2.83 billion, $6.37 per diluted share, last year.

Comparable sales, excluding the impacts from changes in gasoline prices and foreign exchange, increased by 5.8%, while eCommerce comparable sales rose by 18.2%. Comparable sales for the four-week period ending March 3, 2024, also showed growth of 5.6%, with eCommerce comparable sales increasing by 16.0%.

Costco's core-on-core gross margin increased by 25 basis points (bps) year/year, better sequentially, and up modestly compared to the prior three-quarter average. This was largely due to lapping heightened markdowns in the prior year.

Telsey Advisory Group raised their COST target to $800 from $785, citing the company's strong business trends and expectations of solid EPS growth driven by a mid-single digit (MSD) comp, MSD and high-single digit (HSD) membership fee income growth, customer data leverage, and effective merchandising and cost management.

For the four-week reporting month of February, ended March 3, 2024, the Company reported net sales of $18.21 billion, an increase of 6.9% from $17.04 billion last year. Net sales for the first 26 weeks were $123.15 billion, an increase of 6.1% from $116.06 billion last year.

The company's gross margin improved by 25 basis points year-over-year, reflecting solid core-on-core performance. This improvement was driven by the absence of heightened markdowns experienced in the previous year.

Costco has demonstrated resilience and growth in a challenging operating environment, with solid sales and high membership renewal rates (~132 million members). The company is expected to continue to generate solid EPS growth in FY24, driven by MSD comp, MSD-HSD membership fee income growth, leverage of customer data, and effective management of merchandising and costs.

Telsey Advisory Group reiterated their Outperform rating and raised their 12-month price target by $15 to $800, based on applying a P/E multiple of ~45x to their new FY25 EPS estimate of $17.82.

In conclusion, Costco's Q2 earnings report reflects the company's ability to navigate a difficult operating environment and maintain its strong business momentum. With its solid sales, high membership renewal rates, and effective management of costs, Costco is well-positioned to continue its growth trajectory in the coming quarters.