Please ensure Javascript is enabled for purposes of website accessibility

Costco Earnings: What to Watch

By Demitri Kalogeropoulos - Oct 1, 2017 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here are three metrics investors will be following when the warehouse retailing giant posts earnings results on Oct. 5.

Many investors are avoiding the retailing industry today because of the weak selling environment facing brick-and-mortar companies. Increased competition from online specialists is forcing profit-sapping price cuts. Recently, both Target (TGT 0.81%) and Kroger (KR 1.71%) lowered their earnings outlook as they focus on protecting market share.

Against that backdrop, Costco (COST 1.35%) will post its fiscal fourth-quarter results, and the country's second-biggest retailer should have plenty to say about the retailing industry when it announces its numbers on Thursday, Oct. 5.

Here's what to look for in the report.

A customer browses the aisle at a warehouse retailer.

Image source: Getty Images.

Sales growth

We'll find out this week whether Costco's growth momentum is holding up or crumbling in the face of increased competition from online and offline sources. After all, comparable-store sales gains in fiscal 2016 dove to 4% from 7% in the prior year.

A significant part of that slowdown likely came from temporary factors including grocery price deflation and Costco's loyalty credit card switchover, which implies that the warehouse giant should see its expansion pace recover as those issues fade.

Chart showing annual comps gains dropping to a 4% pace last year.

Annual comps growth, excluding fuel sales and foreign exchange moves. Chart by author. Data source: Costco filings.

That rebound isn't showing up in the results so far. Through the first nine months of fiscal 2017, comps inched higher by 3%. That's significantly better than the flat results both Target and Kroger have managed over the last six months, but Costco investors will be looking for the company to put even more distance between itself and its retailing peers this week.

Profitability

The sluggish industry growth trends have convinced many companies to rely on price cuts to keep customer traffic flowing. Kroger's management in June, for example, promised to double down on lowering prices as it dialed back its earnings outlook for the year. "We have no intention of giving up the momentum we've gained on low prices," CEO Rodney McMullen said. 

Since it gets most of its earnings from membership fees, Costco isn't particularly vulnerable to these moves. Its gross profit margin, after all, is already far below that of peers -- at 13% of sales compared to 22% for Kroger and Wal-Mart's 26%. Still, it will be interesting to see whether pricing moves by rival retailers have forced Costco to respond.

Membership metrics

Healthy membership trends form the foundation for Costco's entire business model. That's why it's good news that the company will likely post a solid bounce in the subscriber base for the fiscal year, mainly thanks to the addition of new warehouses to its store footprint. Costco just last year set a record for member signups in a store it opened in Tulsa, Oklahoma, which is good evidence that the retailer continues to deliver an unbeatable value to its customers.

Chart showing renewal rates.

Chart by author. Data source: Costco filings.

Management will also update investors on its renewal rate trends this week. These slipped lower in fiscal 2016 in a decline that management blamed mostly on the co-branded credit card shift. However, with the card change behind it, and with members now benefiting from the extra perks it brings, renewal rates should start ticking higher again.

Costco's new credit card is generating significant fee savings for the business, and management is planning to direct almost all of those gains right back to its members in the form of lower prices. That should help Costco continue posting healthy customer traffic trends even as it rolls out its first membership fee hike in over five years.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$485.76 (1.35%) $6.48
Target Corporation Stock Quote
Target Corporation
TGT
$142.38 (0.81%) $1.15
The Kroger Co. Stock Quote
The Kroger Co.
KR
$48.14 (1.71%) $0.81

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.