How Costco Earnings Growth Could Outpace Wal-Mart,Target

Costco Wholesale (NASDAQ: COST  ) will release its quarterly report on Wednesday, and despite concerns about valuation, the stock has enjoyed a long rally to record highs that has continued over the past quarter. For Costco earnings, the big question is whether the big-box business can hold off rival Wal-Mart (NYSE: WMT  ) as well as fellow top retailer Target (NYSE: TGT  ) and keep producing greater profits in a highly competitive retail environment.

Costco has earned praise throughout its history for a combination of business success and corporate stewardship. Having started as a simple warehouse facility, Costco evolved into a full-service retailer offering fresh meat and produce, food courts, and specialty stores including optical and mobile vendors. Former longtime CEO Jim Sinegal achieved legendary status for his leadership of the company, with an unusual emphasis on retaining employees and helping to set up a corporate culture that emphasizes the interests of all stakeholders. Successor Craig Jelinek has sought to continue in his footsteps. Let's take an early look at what's been happening with Costco Wholesale over the past quarter and what we're likely to see in its report.

Stats on Costco Wholesale

Analyst EPS Estimate

$1.46

Change From Year-Ago EPS

5%

Revenue Estimate

$32.85 billion

Change From Year-Ago Revenue

2%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

How fast can Costco earnings grow?
Analysts have held steady on their views about Costco earnings in recent months, keeping estimates stable both for the quarter that ended in August and for the 2014 fiscal year. The stock has also flattened out after its sharp rise over the past several years, rising just 3% since early July.

Costco's long-term success arises largely from its innovative business model. Rather than trying to eke out profits solely from the razor-thin margins on retail sales that are notorious in the industry, Costco profits from selling memberships to generate recurring annual revenue from its loyal customer base. With 69 million members in eight different countries, including the U.S., Australia, and South Korea, Costco has customers who want to do more business with the retailer to get their money's worth from membership. Even as Wal-Mart and Target have cited pressure on consumers in holding back sales, Costco has put up monthly same-store sales gains of 4% to 6% in each of the three months of its last quarter.

But Costco has also made some smart business decisions that have helped it avoid potential obstacles to growth. Most notably, the retailer is in no hurry to expand into China, with Jelinek noting that the emerging nation will still be around 10 to 15 years from now. With the company having made progress expanding in Japan, Taiwan, and elsewhere in Asia, Jelinek doesn't see China as a must-have market right now, especially given some of the challenges that Wal-Mart has had in its efforts to expand there.

In addition, management continually tracks its competitors to make sure Costco is not falling behind. With regular visits to Target stores as well as Sam's Club, BJ's Wholesale, and Trader Joe's, Sinegal and Jelinek have been constantly on the lookout for what Sinegal calls "the really good stuff" those stores are doing well.

In the Costco earnings release, watch for the company to expound on exactly which direction it intends to move in its growth plans. With expansion opportunities around the world, as well as initiatives to streamline operations in the U.S. for greater efficiency, Costco's growth track record shows few signs of slowing down anytime soon.

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