Costco Membership Drop an Irksome Sign of Consumer Pullback

Costco Membership Drop an Irksome Sign of Consumer Pullback image 111013 PC clarkCostco Membership Drop an Irksome Sign of Consumer PullbackIf there’s one company that has been a stalwart wealth creator on the stock market it’s Costco Wholesale Corporation (COST).

The company’s been on a roll since the mid-2000s, and up until recently, it reported excellent financial growth in its operations. But its most recent quarterly earnings came in shy of expectations and were a surprise for those who follow the business.

Costco’s been doing well over the last several quarters, and it is still very much a growing corporation. But in the 16 weeks ended September 1, 2013 (the company’s fourth fiscal quarter of 2013), sales came in just shy of consensus, growing five percent comparatively to $31.77 billion.

Earnings barely grew to $617 million, or $1.40 per share, compared to $609 million, or $1.39 per share. Lucrative membership sales were $716 million during the quarter, growing much less than in comparative quarters.

The company incurred higher expenses and long-term debt grew significantly in the most recent quarter. On the positive side, Costco’s cash and short-term investments soared another billion dollars to $6.12 billion from $4.9 billion.

However, shareholders’ equity fell and total liabilities grew quite a bit. You can’t call the company’s quarter a disappointment, since it is still growing, but a dividend increase would have been nice.

This was Costco’s first earnings miss in eight quarters.

Also coming in short of expectations was Family Dollar Stores, Inc. (FDO), whose 2013 fiscal fourth-quarter sales grew 5.8% to $2.5 billion. Earnings grew 26% to $102 million, but management said that comparable store sales were flat, and they struck a cautious tone on fiscal 2014.

Rounding out the evidence of consumer caution, YUM! Brands, Inc. (YUM), which operates the Kentucky Fried Chicken (or KFC), Taco Bell, and Pizza Hut restaurants, reported flat to declining business conditions.

The company said that global sales grew only one percent, with system sales in China falling two percent and U.S. sales remaining flat.

Same store sales dropped 11% in China, grew one percent in the rest of the world, and were flat in the U.S. market. Global operating profits fell internationally and stayed even in the U.S.

Last month YUM! Brands increased its quarterly dividend 10%, which was a positive development.

But these corporate earnings results from consumer-related companies are uninspiring. YUM! Brands saw its share price drop significantly after its earnings report.

Target Corporation (TGT) has seen its share price drop markedly since July, and even Wal-Mart Stores, Inc. (WMT) is well off its 52-week high set in May.

While it’s difficult to draw exact conclusions from just one quarter, it’s pretty clear with the current earnings results in this sector that consumers are being highly cautious.

The worrisome part of Costco’s numbers wasn’t the company’s total quarterly sales but its membership growth specifically. That’s the canary in the coal mine for the discount superstore business model. (See “Why These Two Big Company Earnings Reports Concern Me So Much.”)

The last two quarters saw the company generate strong membership sales growth. A flattening out of highly profitable membership fees signals trouble ahead.

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