The earnings surprise led to a 5.4 percent drop in Costco’s stock Wednesday — a big reversal for a Wall Street favorite that’s usually perceived as bucking the sluggishness and instability that have beset many U.S. retailers.
Weakness in the currencies of key foreign markets for Costco contributed to the warehouse giant’s disappointing earnings for the quarter ended in November, a company executive told analysts Wednesday.
Costco’s quarterly net income of $1.09 per share fell 3 cents from last year and was well below analysts’ average estimate of $1.17 per share.
The wide miss led to a 5.4 percent drop of the stock in Wednesday’s trading — a big reversal for a Wall Street favorite that’s usually perceived as bucking the sluggishness and instability that have beset many U.S. retailers. Costco shares closed at $159.72 on Wednesday.
Chief Financial Officer Richard Galanti said in a conference call Wednesday the strong U.S. dollar versus weaker currencies in Canada, Mexico and Korea resulted in a $42 million hit to earnings, equivalent to about 4 cents per share.
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The reason is that when the dollar is stronger than foreign currencies, the money made abroad has less value when translated into a balance sheet that’s reported in U.S. dollars.
Galanti also cited a litany of other one-time items that chipped away at the bottom line. That includes a $22 million hit from litigation and regulatory matters, the rising cost of stock compensation for employees given the rapid run-up of Costco’s shares this year, and a slowdown in co-branded credit card sign-ups due to the fact that the company dropped its longtime partner, American Express, but still hasn’t transitioned to its new relationship with Citi and VISA.
Joe Agnese, an analyst with S&P Capital IQ, wrote in a research note that he expects the credit-card impact to persist through fiscal 2016.
But the foreign-exchange issue is clearly significant, given the increasing importance international operations have on Costco. Nearly a third of its warehouses are overseas, and almost half of the new locations it opens every year are abroad. The company recently opened its second Spanish location, in the capital of Madrid, and it will soon expand into France.
Galanti pointed to one advantage of having a stronger dollar: It’s cheaper to buy land and build new warehouses abroad.
Costco did report some positive news from abroad. Sales in China, where its products are sold through Chinese online retailer Alibaba, are “going well,” Galanti said.
On Singles Day, a Valentine’s Day-like holiday in November that has become a retail phenomenon thanks in part to the efforts of Alibaba, Costco received 300,000 orders, Galanti added.
Galanti said that at some point, perhaps over the next five years, Costco might open “a couple units” in China, but nothing is sure as the company balances strategic priorities. “We’ve got a lot going on,” he said.
Net sales rose 1 percent to $26.63 billion, but total revenues, including membership fees, were $27.2 billion, also below the average analyst estimate.
Costco did well in so-called comparable sales, a key metric for the industry. When factoring out the deflation of gasoline prices and the strengthening of the U.S. dollar seen in the last year, total comp sales were up 6 percent across the company’s entire global operations.