COST Trade Update

by Dan May 25, 2011 10:25 am • Commentary

COST reported this morning, which appeared generally fine on the surface….Conference call starts at 11am.

From Bloomberg:

Net income rose to $324 million, or 73 cents a share, in the quarter, from $306 million, or 68 cents, a year earlier, the Issaquah, Washington-based company said today in a statement. Analysts projected 77 cents a share, the average of 21 estimates compiled by Bloomberg. Revenue rose 16 percent.

Sales at stores open at least a year, excluding fluctuations in gasoline prices and currency exchange rates, rose 7 percent, Costco said. Sales on that measure advanced 11 percent at the company’s 156 stores outside the U.S. and 6 percent at 425 locations in the U.S. and Puerto Rico.

Stock is trading down ~2.5% which is basically in-line with the implied move…

Technically the chart looks a little broken and could see a move back to it’s 100 day moving average at about $75….

COST 1 Yr Chart   Provided by Bloomberg LP

Yesterday I bought a tight June Put Spread in June as I thought the stock was a bit extended and a lot of good news was in the name heading into earnings……

-I bought the June 80/77.5 Put Spread for .52 when stock was above 82.00,….with stock at 79.30 this spread is now worth about 1.00….I am going to let it ride as I think the SPX is going to test 1300 and the names like this should have some air come out of them…..especially in a retail environment where stocks like ARO, GPS and RL are reacting very poorly to earnings results…..As stated above, the conference call starts at 11am, if there will be any analyst adjustments to ratings or estimates it will come after that……


ORIGINAL POST from May 24th, 2011:

Costco (COST) stock. Not the best deal in town
Costco (COST) reports earnings tomorrow morning, pre-open….

-Implied move in the options market is only about 2.5% which is rich to the ~1% average move over the last 8 quarters…..

-stock is up 14% ytd and up 75% since late August 2010.

-Wall Street analyst community is mixed on the name with 15 buys, 11 holds and 2 sells.

-as you would expect implied vol is elevated today into earnings at about 22.5 vs the 30 and 60 day realized vol of about 14 and 18 respectively….

On Fridays Option Action my friends and colleagues Carter Worth and Mike Khouw took a look at COST into tomorrow’s earnings event see here:

Morgan Stanley’s Preview to clients Yesterday:

3Q EPS to be Reported 5/25: We estimate $0.79 for the quarter vs. $0.77 consensus, up 23.5% from year-ago. We expect sales of 19.98B, membership fee growth of 10.6%, gross margins up 2 bps to 10.90%, and operating margins up 22 bps to 2.96%.
Comps Strong Enough for Operating Leverage With February U.S. comps at 4% (ex fuel), March at 7% and April at 6%, the company is clearly comping above the 4% we believe it needs to deliver operating margin leverage. However, the sharp increase in gas prices
could dampen some of the margin positives (see below).

Membership Growth Re-accelerating: With 23 net new stores opening in FY2011 (~4% square footage growth) and ~24 in FY2012 (versus only 13 in F2010),
we estimate that membership fee growth will ramp from 8.4% in F2010 to 10.9% in FY2011 and 11.3% in FY2012 due to ramping store growth and a likely $5-fee
increase which we believe will be announced this year. Eight high membership Asian stores were planned for F2011. We believe the earthquake in Japan has pushed
at least two of these openings into F2012.

Gas Increase Could be a Margin Drag: Despite big volume gains in 3Q (up 12-14%), our gas models showthe run-up in gas costs has largely wiped out gas profits in the quarter. Year-ago gas was also only marginally profitable, so we estimate a YoY drag of ~$0.01-$0.02.

-Technically, the chart appears to be rolling a bit. With some of the action that we saw last week out of retailers like ARO and GPS I would rather make a low premium, high(ISH) probability directional play…..

[caption id="attachment_2167" align="aligncenter" width="300" caption="1 Yr COST Chart provided By Bloomberg LP"][/caption]

[caption id="attachment_2168" align="aligncenter" width="300" caption="SPY & RTH vs GPS & ARO 1 Yr Chart Provided by Bloomberg LP"][/caption]

TRADE: With stock at lofty levels I agree with my Options Action friends and with the stock a little higher I bought the JUN 77.50 / 80 Put Spread for .55,

I risk .55 to make 1.95 down 6% by June Expiration.