Thursday, March 3, 2016

Costco Earnings

One of the newer additions to the portfolio reported earnings today. Costco reported EPS figures of $1.24 per diluted share, and revenues of $27.57 billion up 3% from last year. The company noted the impact from foreign exchange and price deflation took a larger than expected bite out of revenue and earnings.

Adjusted figures were decent showing a stable underlying trend. I'm not always the biggest fan of adjusted numbers since it allows management to temporarily cloak the real picture. But they are useful when you need to determine the underlying trend in the business is still intact.  No matter these impacts are very real and do take a bite out of company revenues and earnings. It's an issue that every company in the portfolio has been dealing with except for MO. In reality earnings declined because of these uncontrollable factors and that's part of the business cycle. We must deal with it and depend on management to navigate in proper fashion.

I felt confident enough about the company to make an add to the portfolio today.  I clearly got a better price than my first buy which I bought prior to the earnings release. Big mistake and one I regret. It left a sour taste in my mouth that I let my emotions play a role in that purchase.  I'm an ardent fan of the company and shopper at both physical locations and online.  I'm not likely going to add anymore shares after this for awhile. I don't want to get overly exposed to falling retail sales which has been hurting plenty of other companies right now. But Costco customers are more resilient to job losses and income pressures than at other retailers.

People claim that Amazon is going to put a lid on the company one day. I don't agree with that notion.  I use Amazon myself and find it useful for other shopping habits, but not everything. Costco has a unique merchandising operation and pricing system that keeps buyers coming back to stores. Also if Amazon is going to be it's downfall then why on earth are both Costco and Wal-Mart opening new locations each year? Maybe margins get more compressed but they are already so low there is not much more room for price cutting.  Plus you can't try free samples online at Amazon. Amazon is finally starting to make a profit after years of being a loser. While I haven't dived into the income statement details the impression is the AWS division carries a lot of weight there.  Of course none of this has stopped AMZN stock from outperforming COST for at least the last 5 years. Obviously if it comes down to it I can always buy AMZN too. I mean why would I continue to pass on a great investment if it continues to be one.

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