Nomura Bullish On Costco (COST) Ahead of Earnings Tonight

May 25, 2016 10:11 AM EDT
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Price: $424.34 +0.26%

Rating Summary:
    23 Buy, 11 Hold, 1 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 13 | Down: 27 | New: 42
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Nomura analyst, Robert Drbul, is bullish on Costco Wholesale (NASDAQ: COST) ahead of 3Q16 earnings with a 3Q EPS estimate of $1.25, $0.03 above consensus. He is expecting sales growth of 3.9% to $26.5bn, including a +1.0% total comp sales increase.

The company continues to be negatively affected by deflationary trends across the store, including in meat, electronics, and gas; however, we note 1) Costco’s higher-ASP and margin opportunity in organics (~$4bn business growing >20%; ~15% gross margin vs. 11% avg. for the total company) and 2) the sequential reduction in the negative hit to WMT U.S. comps from food deflation in 1Q16 (-60bps) from 4Q15 (-100bp).

The analyst expects strong membership fee income growth to continue, despite the overhang generated by the upcoming credit card transition to Citi/Visa from American Express, with new member sign-ups growing in the +MSD range and renewal rates at a record global high of 88% (U.S./Canada steady at 91%). He is forecasting an MFI increase of 5.0% to $613mn in 3Q16, an uptick from the 3.6% gain in 2Q (+HSD in CC, ~in line with recent quarters).

The credit card transition is important for two reasons: 1) Costco will benefit from lower interchange fees and 2) the improved rewards program has a strong potential to drive this card to top of wallet for many consumers.

The firm reiterated a Buy rating and price target of $185.

For an analyst ratings summary and ratings history on Costco Wholesale click here. For more ratings news on Costco Wholesale click here.

Shares of Costco Wholesale closed at $142.57 yesterday.

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