Costco Shares Slide As Coronavirus Costs Offset Solid Q3 Sales and Membership Revenues

Costco beat Street revenue forecasts for its May quarter, with sales topping $37 billion, but a surge in costs linked to operating during the coronavirus pandemic ate into its bottom line.

Costco Wholesale Corp.  (COST) - Get Report shares slumped lower in pre-market trading Friday after the bulk-scale retailer posted weaker-than-expected third quarter earnings as a surge in COVID-19 costs ate into its bottom line.

Costco said adjusted earnings for the three months ending on May 10 fell 7.5% from last year to $1.89 per share and missed the Street consensus forecast by around a nickel as COVID-19 costs rose to $283 million, the equivalent of 47 cents per share. 

Group revenues held up well, rising 7.3% to $37.27 million even as foot traffic declined, as the group's U.S. stores remained opened as an 'essential retailer' during the peak of the pandemic in April.

Costco said bulk purchases of essentials such as paper towels, cleaning supplies and food -- typically lower margin items -- offset weaker revenues from jewelry, luggage, third-party gift cards. Still, the average transaction rose 9.3% from last year, the company said, and membership revenues rose 5% to $815 million.

"The quarter included that big $283 million number ... we spent about $32 million on masks, gloves and incremental cleaning and cleaning supplies and things like Plexiglass partitions and you name it are related to COVID, but that's in that $283 million number," CFO Richard Galanti told investors on a conference call late Thursday. 

"Some of the initiatives, some of the initiatives related to $283 million and cost will extend into Q4," he added. "We would expect the incremental expenses related to COVID -- these types of expenses related to COVID to exceed $100 million in Q4, but be quite a bit lower than the $283 million that we had in Q3, we'll have to just wait and see though."

Costco shares were marked 2.18% lower in pre-market trading to indicate an opening bell price of $302.80 each, a move that leaves the stock in negative territory for the year.

"Costco reported another solid quarter, with EBIT growth of 5% on (high single-digit %) comps, which were limited by restrictions to higher-margin ancillary categories and elevated COVID-19-related expenses," said BMO Capital Markets analyst Kelly Bania, who carries a $340 price target with an outperform rating on the stock.  

"Importantly, renewal rates remain strong, and the impact of COVID-19 on renewal rates will likely affect coming quarters," she added. "Our thesis remains unchanged, and we continue to believe COST should remain a core long-term holding across retail/consumer staples deserving of its premium valuation."