11 December 2020

Costco Tops Q1 Views, But Investors Not Convinced

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What’s happening: Costco Wholesale Corp reported stronger-than-projected results for its fiscal first quarter after the closing bell on Thursday.

What happened: With people continuing to stay home amid a resurgence of infections, Costco witnessed another surge in the sales of essential items.

Although Costco exceeded the consensus estimates, it failed to impress investors, whose expectations were elevated after the company reported much stronger numbers in the previous quarter.

What were the results: The discounted shopping chain reported strong growth in sales and earnings for its fiscal first-quarter, with both metrics surpassing expectations.

  • Total revenue grew around 17% to $43.21 billion, which came in ahead of the consensus view of $42.42 billion.
  • Net income surged 38% to $1.17 billion.
  • Excluding one-off items, the company earned $2.30 per share, exceeding the consensus estimate of $2.05 per share.

Why it matters: To limit exposure to infection, shoppers chose to make large purchases from big-box retailers which offer everything under one roof. This resulted in higher store traffic for Costco. Foot traffic at the retailer turned positive in October, growing by 4% versus the same quarter last year.

Due to a surge in covid-19 cases worldwide, Costco witnessed strong demand for essential products, a trend that was also highlighted by rival Kroger when it reported results.

Costco also benefited from the trend among consumers to redirected some of their spending from travel and dining to products like furniture and electronics.

Same-store sales grew 15.4% during the quarter, exceeding consensus estimates, while revenue from memberships grew 7%. Although online sales climbed around 86% last quarter, this represented a slowdown in pace from the previous quarter’s 91% growth.

Costco continued to incur significant charges related to operating in the covid-19 era. The retailer announced $212 million in pre-tax expenses for the quarter.

How shares responded: Costco’s shares remained almost flat at $372.86 in after-hours trading on Thursday, following a 0.4% decline in the regular session. The stock has added around 10% over the past three months.

What to watch: With positive news from various pharma companies developing covid-19 vaccines, consumers are likely to stop stockpiling essential items. However, Costco may benefit from a rise in footfall as consumers return to shopping at brick-and-mortar stores.

The Markets Today

     

European stocks will be in focus today with investors monitoring Brexit trade talks.

Context: European stocks closed mostly lower on Thursday following the ECB’s recent policy decision and fresh stimulus measures.

Details: As widely expected, the ECB announced plans to increase the size of its monetary stimulus purchase program by €500 billion to €1.85 trillion. The bank also extended the time horizon of its scheme to March 2022 to provide adequate support to the coronavirus-hit economy.

The ECB also maintained its main refinancing rate at 0% and its marginal lending facility rate at 0.25%.

Meanwhile, policymakers lowered their economic growth projections for the region, from September’s forecast of 5% growth to merely 3.9% in 2021. Inflation expectations were also lowered, with policymakers projecting inflation rising to 1.1% by 2022, versus their previous forecast of 1.3%.

Markets were keeping an eye on Brexit trade talks, with fishing and competition rules remaining the key issues for the deal. British Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen held a meeting and committed to ending Brexit trade talks by Sunday.

On the economic data front, the UK reported GDP growth of 0.4% for October, a slowdown from September’s 1.1% growth. Investor sentiment was also dampened by the continued rise in covid-19 infections across the world, with the US reporting a record 3,054 deaths on Wednesday.

The pan-European Stoxx 600 index fell 0.44% on Thursday, with banking stocks leading the decline. However, oil and gas shares bucked the trend to record gains of around 1.5%.

The German DAX 30 fell 0.33% on Thursday, while the FTSE 100 and French 40 gained 0.54% and 0.05%, respectively.

What to watch: Investors will be monitoring the progress in the Brexit trade deal, with hopes of both sides reaching an agreement by the weekend.

Markets also await economic releases from various European nations, including Germany’s consumer prices, Spain’s consumer price index and Italy's industrial production.

Covid-19 remains a major concern for the markets, with total cases surpassing 69.5 million worldwide.

Other Markets: US indices closed mostly lower on Thursday, with the Dow Jones index and S&P 500 down by 0.23% and 0.13%, respectively, and the Nasdaq 100 gaining 0.54%.

Support & Resistances
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Futures at 0400 (GMT)

What else to watch today

     

Turkey’s current account, India's industrial production, Mexico’s industrial production and foreign exchange reserves, Russia's balance of trade, Canada’s capacity utilization, Russia's gross domestic product as well as US producer prices, University of Michigan's consumer sentiment index and Baker Hughes crude oil rigs.

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