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3 Things to Watch in the Stock Market This Week

By Demitri Kalogeropoulos – May 21, 2017 at 9:51AM

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Why shares of Costco, Ulta Beauty, and Tiffany could make big moves over the next few trading days.

Stocks partially recovered from a sizable one-day drop last week to end up with just minor declines. Both the Dow Jones Industrial Average (^DJI 0.45%) and the S&P 500 (^GSPC -0.03%) indexes shed less than 0.5% and remain up about 5% year to date.

^DJI Chart

Data by YCharts.

Earnings season promises to continue producing volatility for investors over the week ahead. A few of the most anticipated reports set to be released include those from Tiffany (TIF), Costco (COST -0.15%), and Ulta Beauty (ULTA 0.22%).

Tiffany's profit margin

Tiffany shares have rebounded lately, after the luxury retailer posted decent quarterly results in March and predicted a return to sales growth in fiscal 2017. Sure, sales dropped 3% worldwide over the holiday season because of what management described as softness across all its jewelry categories, but the combination of falling costs and rising prices helped push gross margin up nearly two percentage points to 62% of sales, protecting bottom-line profitability.

Executives aren't expecting general selling conditions to improve much in the new fiscal year, but the company does believe sales growth will return in 2017 following two straight years of declines. A roughly 9% increase in earnings, meanwhile, would put the company within striking distance of the $484 million it earned in 2015, its most profitable year on record. 

Costco's customer traffic

Costco will announce its fiscal third-quarter numbers on Thursday, just before the company delivers a $3.1 billion special dividend, equating to $7 per share. The warehouse giant's stock has kept pace with the market over the past year through major operating challenges, including grocery price deflation and a sharp slowdown in customer traffic growth. Comparable-store sales are up 2% over the past six months, compared with 4% in 2016 and better than 6% in each of the prior five fiscal years. 

A Costco shopping cart.

Image source: Costco.

Investors will be watching how comps play out but will likely pay more attention to Costco's membership trends. Renewal rates and membership fees were weaker than expected over the past few quarters due mainly to its shift to a new co-branded credit card. But now that the changeover is behind it, and with membership prices slated to rise on its huge subscriber base, fee income should rebound. Management is hoping that its renewal rates improve, or at least hold steady, even as the price of a Costco membership rises.

Ulta Beauty's 2017 forecast

Ulta Beauty has had no problem booking healthy sales gains even as customer traffic slows in the broader retail industry. In fact, the spa and beauty specialist's comps trounced management estimates last quarter by rising 16.6% to a near record high. Ulta enjoyed an 11% increase in shopper traffic and a 6% jump in average spending per visit last quarter.

A woman looks in the mirror to apply makeup.

Image source: Getty Images.

CEO Mary Dillon and her team forecast a 10% comps gain in the first quarter. While that would mark a sharp slowdown from prior periods, it would still edge past their long-term guidance projecting 8% annual gains in fiscal 2017 through 2019.

Investors should also watch for the e-commerce business to contribute a growing portion of sales gains over time. And as long as comps remain at or near management's long-term targets, Ulta's store expansion plans are likely to stay aggressive. The company aims to add 100 new locations to its base this year.

Demitrios Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool owns shares of and recommends Costco Wholesale and Ulta Beauty. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$34,347.03 (0.45%) $152.97
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,026.12 (-0.03%) $-1.14
Costco Wholesale Stock Quote
Costco Wholesale
$533.66 (-0.15%) $0.83
Ulta Beauty Stock Quote
Ulta Beauty
$448.35 (0.22%) $0.98
Tiffany & Co. Stock Quote
Tiffany & Co.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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