After missing the Zacks Consensus Estimate by 6.8% and 3.1% in the first and second quarters of fiscal 2016, respectively, Costco Wholesale Corporation (COST - Analyst Report) made a sharp comeback, delivering a positive earnings surprise of 1.6% in the third quarter. This indicates that the company managed to sail through high tides and to an extent succeeded in allaying investors’ fears. Stiff competition and cautious consumer spending have been weighing upon the sector’s performance.

Costco reported quarterly earnings of $1.24 per share that beat the Zacks Consensus Estimate by a couple of cents and also increased 6% from $1.17 recorded in the prior-year quarter.

Costco Wholesale Corporation (COST - Analyst Report) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

Delving Deeper

The warehouse retailer’s total revenue, which includes net sales and membership fee, rose 2.6% to $26,769 million in the reported quarter. Quarterly net sales went up 2.5% year over year to $26,151 million, whereas membership fee increased 5.8% to $618 million. However, total revenue fell short of the Zacks Consensus Estimate of $26,976 million. This marked the sixth straight quarter of revenue miss for the company.

Costco’s comparable-store sales (comps) for the third quarter remained flat, following an increase of 1% in the preceding quarter, and reflect flat comps at U.S. locations, 1% growth in locations at Canada and a 2% drop at Other International outlets.

Excluding the effect of lower gasoline prices and currency headwinds, the company witnessed comps growth of 3% during the quarter, with U.S., Canada and Other International comps registering an increase of 3%, 8% and 3%, respectively.

Costco’s operating income in the quarter under review rose 4.5% year over year to $858 million, whereas operating margin (as a percentage of total revenue) expanded 10 basis points to 3.2%.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,884 million, and long-term debt (including current portion) of $5,114 million. The company’s shareholders’ equity was $11,505 million, excluding non-controlling interests of $243 million.

Let’s Conclude

Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of the merchandise it offers. Its strategy to sell products at highly discounted prices has helped in sustaining growth amid soft economic conditions. Also, the company’s diversification strategy acts as a natural hedge against risks that may arise in specific markets.

However, Costco faces stiff competition from Target Corporation (TGT - Analyst Report) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT -Analyst Report) that follow a similar business model, which pushes through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid stiff competition, may depress sales and margins, going forward.

Costco currently operates 705 warehouses, comprising 493 warehouses in the U.S. and Puerto Rico, 90 in Canada, 36 in Mexico, 27 in the U.K., 25 in Japan, 12 in Korea, 12 in Taiwan, 8 in Australia, and 2 in Spain.

Zacks Rank

Costco currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the retail space is Carter's, Inc. (CRI - Snapshot Report) , holding a Zacks Rank #2 (Buy).