Among the retail sector, Costco is still a defensive pick, mainly due to the fact that its business model should keep driving market share growth in the longer terms. Therefore the company might be able to post double-digit EPS growth. In this way, Costco delivered EPS above the consensus estimates for the second quarter.
The gross margins of the merchandise picked up to 10.6% in the second quarter, from 10.5% in the same period last year. The merchandise markup of the company is still around a half of its big-box competitors from the industry. In addition with the 15% growth in membership fees, Costco showed that it wasn’t affected significantly by the increase in annual fees, while the overall gross profits as a percentage of revenues climber by 16 basis points on the year.
This helped Costco increase its operating margin to 3% in the second quarter, from 2.8% last year, which was also fueled by selling, general, and administrative expenses staying flat at 9.5% of sales. Therefore, Costco has the potential to grow its operating margins without losing market share.
The retailer posted EPS of $1.10 for the second quarter, which is around $0.05 above the consensus estimate. The EPS on a GAAP basis amounted to $1.24, including a $0.14 per share tax benefit. The operating EPS grew by 17% on the year, which was almost the same as the 18% growth in net income.
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