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Entrepreneur
Kurra Bewarse
Username: Entrepreneur

Post Number: 3387
Registered: 05-2011
Posted From: 65.35.45.47

Rating: N/A
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Posted on Friday, March 05, 2021 - 1:10 pm:   

COST Costco earnings hit by COVID-related expenses as tough yr/yr comparisons also loom (310.17 -8.87)

At this time last year, the initial wave of food and essential goods stockpiling landed at Costco (COST) as pandemic fears began gripping the country. As shoppers frantically stocked up on bulk items, it soon became clear that COST was in line to produce robust financial results. Even as the stockpiling phenomenon diminished later in the spring, customers continued filling their shopping carts to the brim to avoid making additional trips to the store. Meanwhile, sales in COST's formerly insignificant eCommerce channel began booming due to the monumental shift toward online shopping.

Today, these favorable trends remain largely in place, as indicated in last night's 2Q21 earnings report, but slower growth for COST is on the horizon. In anticipation of this deceleration, shares have tumbled by 15% this year. Not only will the warehouse retailer begin lapping very difficult yr/yr comparisons, but shopping activity could soon return to more normalized behaviors.

These headwinds haven't fully materialized yet, though. In Q2, total company comparable sales, excluding changes in gasoline prices and FX, grew by a healthy 12.9%. COST benefited from a strong holiday shopping season early in the quarter, while fresh foods continued to experience high demand.

The eCommerce channel was a standout once again, as sales soared by 75%. A familiar set of product categories led the way, including consumer electronics, home and garden, and health and beauty. Each of these groups experienced an upswing during the pandemic, driven by increased spending for at-home related products.

While total sales grew by nearly 15% to $44.8 bln, topping the $43.7 bln consensus estimate, EPS of $2.14 missed the $2.31 expectation. In fact, this was COST's first bottom-line miss in three years. On the surface, COST's earnings shortfall may look alarming, but some context is needed.

During the quarter, the company incurred $246 mln in COVID-related costs, including higher wages and cleaning/disinfecting expenses. Excluding these costs, the company would have generated EPS of $2.55, easily exceeding analysts' forecasts. In other words, COST's earnings miss wasn't the result of poor execution or weak sales.

Additionally, the $2/hour boost that COST provided to employees throughout the pandemic expired on February 28. Although the company is permanently bumping starting wages higher by $1/hour, the $1 bln+ wage expense increase that COST experienced over the past twelve months will be cut by more than 50% this year.

The reduced expense comes at an ideal time because yr/yr growth will be difficult to generate moving forward. In February, U.S. comparable sales on a reported basis were up 10.3%, reflecting a sharp slowdown from January's 15.4% growth. During last night's earnings conference call, CEO Richard Galanti noted that the fourth week of February last year saw a surge in sales due to stockpiling. This effect positively impacted February 2020 sales by about three percentage points.

It doesn't get easier for COST from here. Last March, U.S. adjusted comparable sales jumped by 12.1%, followed by a brief reprieve in April (flat yr/yr) as sales were hindered by the closure of optical, travel, and photo kiosks, along with food courts. Thereafter, COST faces a gauntlet of tough comparisons with May U.S. adjusted comparable sales up 5%, followed by growth of 13.6% in June, 15.7% in July, and 14.3% in August.

Although the Q2 earnings miss is an easy target, the weakness in COST shares is more related to the company's lower growth prospects this year. Looking beyond the challenging yr/yr comparisons and the normalization of shopping patterns, COST is a premier retailer that is likely taking market share. Once this readjustment in the stock plays out, we believe that COST will begin to look appealing to investors again.

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