25 September 2020

Costco Shares Tumble Despite Strong Earnings Beat

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What’s happening: Shares of Costco Wholesale Corp. fell in extended trading on Thursday despite the wholesale chain reporting stronger-than-expected results for its fourth quarter.

What happened: Retailers of essential commodities have benefited significantly during the pandemic. Apart from food and other essentials, Costco witnessed strong demand for electronics and sporting products.

Despite recording the highest quarterly sales growth in around three years, Costco saw its shares move lower in after-hours trading.

How were the results: The discount retailer reported growth in earnings and sales for the fourth quarter, with both metrics exceeding expectations.

  • Sales grew 12.5% to $53.4 billion, exceeding the consensus view of $52.1 billion.
  • Same-store sales climbed 11.4%, ahead of the 11% estimate.
  • Earnings came in at $1.39 billion, or $3.13 per share, versus $2.47 per share in the same quarter last year.
  • Excluding onetime items, the company earned $3.04 per share, convincingly beating the consensus estimate of $2.80 a share.

Why it matters: Costco’s strong quarterly results didn’t surprise markets, as the company had issued preliminary sales figures earlier this month, and reported same-store sales numbers for August.

The company reported double-digit growth in comparable-sales numbers for the last two months, exceeding analyst expectations.

“As people are spending less on travel, air and hotel, and dining out, they seem to have redirected at least some of those dollars to categories like lawn and garden, furniture and mattresses, exercise equipment, bicycles, housewares, cookware … and the like,” CFO Richard Galanti said.

Membership income fee grew 5.3% to $1.11 billion, with online sales almost doubling last quarter.

Costco recorded a rise in costs related to covid-19 for the second consecutive quarter. The warehouse chain spent around $281 million on premium wages and sanitation in the fourth quarter.

How shares responded: Costco’s shares declined by 2.5% to $338.30 in after-hours trading, after edging higher by 0.7% during the regular session. The stock has gained 16% over the past three months.

What to watch: With government loosening coronavirus-related restrictions and people feeling more comfortable to enter stores wearing masks, investors expect Costco’s results to continue to improve in the near term.

Markets will also keep an eye on the company’s coronavirus-related costs in the current quarter, as the figure is expected to decline over time.

The Markets Today

     

US stocks will be in focus today, ahead of data on durable goods orders from the country.

Context: US stocks closed with a modest gain on Thursday, ending a volatile session as markets struggle to find its footing due to various uncertainties.

Details: Uncertainties remained with no signs of fresh stimulus from the Congress. Markets took solace in reports of House Democrats preparing a new covid-19 bill worth $2.4 trillion, although this is $1 billion lower than the earlier proposed package.

Jobless claims also disappointed markets, rising 4,000 to 870,000 in the latest week, and coming in worse than the expectations of 850,000.

Solid housing numbers provided some support to the markets, with sales of new single-family homes rising 4.8% to an annual rate of 1.011 million in August.

Accenture’s shares declined by 7% on Thursday after the company reported weaker-than-expected quarterly results. EW Scripps Co’s shares jumped by 8% after the company confirmed plans to buy ION Media for $2.65 billion.

The Dow Jones index gained 52.31 points to settle at 26,815.44, after rising as high as 27,094.85 earlier in the session. The S&P 500 inched up 0.3% to settle at 3,246.59, after entering correction territory (10% drop versus a recent peak). The Nasdaq 100 gained 0.4%, closing at 10,672.27.

What to watch: Markets await data on durable goods orders, which grew by 11.2% in July and are expected to rise another 1.5% in August.

Covid-19 remains a major concern for investors, with total cases crossing 7 million in the US.

Other Markets: US indices closed higher on Thursday, with the Dow Jones, S&P 500 and Nasdaq 100 up by 0.2%, 0.3% and 0.37%, respectively.

Support & Resistances
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Futures at 0400 (GMT)

What else to watch today

     

Eurozone’s household credit growth, loans to private sector, money supply M3 and European Council special meeting, Italy's manufacturing confidence index and consumer confidence index, Turkey’s tourist arrivals, UK’s car manufacturing output, South Africa's SACCI business confidence index, France’s initial jobless claims and unemployed persons, Mexico's economic activity index, Russia’s corporate profits and business confidence, Brazil’s federal tax revenues, Canada’s government budget value as well as the US Baker Hughes crude oil rigs count.

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