Costco Wholesale Corporation Gets Ready for Faster Earnings Growth

Source: Costco

Warehouse-retailer Costco Wholesale (COST -0.55%) has an impressive reputation among its shoppers for value, and its longtime investors have reaped the rewards of the retail giant's success over the decades. As it closes out its 2014 fiscal year, Costco shareholders hope to see that the company has carried stronger earnings-growth momentum into the fourth quarter and set the stage for a strong 2015.

Costco's business model revolutionized the retail industry, with its ability to charge an annual membership fee just to give shoppers the right to purchase goods from its stores proving to be an essential tool in generating profits. By collecting money upfront, Costco can trim its profit margins to the bone on what it sells to its members, increasing customer satisfaction and undercutting Wal-Mart (WMT -0.65%) and other traditional retailers. Moreover, Costco has managed to suppress the competitive threat that Wal-Mart's Sam's Club poses. Let's take an early look at what's been happening with Costco over the past quarter and what we're likely to see in its report.

Stats on Costco

Source: Yahoo! Finance

Will Costco finally give investors a nice earnings surprise?
Costco shares have performed well over the past year even though the company hasn't done a good job of meeting investors' expectations. In all of the four previous quarterly reports, Costco has fallen short of earnings projections, and many worry that a repeat of last year's subpar holiday season could get the coming fiscal year off to another poor start. Yet shareholders don't seem concerned, having bid the stock upward by 10% since early July.

The latest round of enthusiasm stems from Costco's preliminary sales report last month, which included revenue figures for the fourth quarter and the full fiscal year. For the quarter, Costco's comparable-store sales rose 6%, helping to boost overall revenue by 9%. Of particular note was an extremely strong August, in which comps were up 7% on a 10% jump in total sales. Moreover, adjusting for unfavorable currency impacts and declining gasoline prices, Costco's comps would have been even higher, easily topping what most had expected to see from the warehouse retailer.

Source: Costco

Costco's sales figures only confirm the positive steps that the company has made recently. As Stock Advisor analyst Sophia Lee noted recently, Costco's ability to retain more than 90% of its members year in and year out in the key North American market has helped give the retailer dependable high-margin revenue. Moreover, efforts to expand internationally have given Costco even greater opportunity, as the competition Costco gets from Sam's Club and other retailers in the U.S. is largely absent in many important overseas markets. Costco's strong reputation for treating employees, consumers, and the communities it serves well also helps bolster the attractiveness of new stores as the company grows.

Still, despite its promise, Costco hasn't yet overcome all the obstacles in its path to success. The fact that revenue growth slowed earlier in the current fiscal year shows that Costco is vulnerable to trends favoring Amazon.com (AMZN -1.14%) and other competitors in the online-retail niche, and Amazon's faster revenue growth shows how lucrative the e-commerce space has been. Costco has made efforts to ramp up its online presence, but most of its capital spending has gone toward store expansion, showing its commitment to the traditional brick-and-mortar model.

After a year in which earnings per share are likely to grow at a tepid pace, Costco investors want to see signs of the double-digit percentage earnings growth that they're expecting. Given its strong sales figures, Costco should be able to satisfy those concerns, but shareholders still need to look closely at the numbers to make sure the company's still on track to deliver in the 2015 fiscal year.