Financial Performance

Investors Uneasy Over Costco Profit Growth

The retailer's Q4 earnings beat estimates and same-store sales were up 6.1% but its shares dropped nearly 3% in after-market trading.
Matthew HellerOctober 6, 2017

Shares of Costco Wholesale have fallen more than 7% since Amazon announced its acquisition of Whole Foods and Costco’s latest quarterly earnings report didn’t do much to ease investors’ concerns.

For the fourth quarter, net income attributable to Costco rose to $919 million, or $2.08 per share, from $779 million, or $1.77 per share, while total revenue increased 15.7% percent to $42.30 billion.

The results beat analysts’ expectations of earnings of $2.02 per share and sales of $41.55 billion. Same-store sales were up 6.1% globally, beating analysts’ estimates of growth of 5.2%.

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Profit was boosted by a hike in membership fees but gross margins in the fourth quarter fell to 13.2% from 13.4% year-over-year as the retailer spent to drive sales and member loyalty. Following the release of the results, Costco shares fell nearly 3% to $162.15 in after-market trading Thursday.

Costco investors “have been accustomed to stronger growth, particularly in terms of same-store sales progress,” InvestorPlace said, noting that Costco, like rivals Kroger and Wal-Mart, is facing growing competition from Amazon and other online choices.”

“There’s no denying that the company’s revenue and earnings growth pace have been slowing as saturation and tougher competition become an increasingly-painful reality,” InvestorPlace added.

Costco has raised annual membership fees by $5 to $60 for Goldstar and business members, and by $10 to $120 for executive memberships. Fees accounted for $2.6 billion worth of last year’s revenue and $943 million of fourth-quarter revenue.

“Those prepaid fees largely ensure loyal patronage though, whereas consumers may not step foot in a Wal-Mart or Kroger on a regular schedule,” InvestorPlace noted.

On a call with analysts, Costco CFO Richard Galanti said the company is expanding e-commerce capabilities to other countries, promoting awareness of its online shopping site to members, and experimenting with new online services.

“All we can do is perform,” he said of the competitive threat from Amazon-Whole Foods, adding that Costco may have to “figure out how to communicate” its low prices to customers who may be spending more at Amazon or other competitors.