How Costco Hopes to Start 2018 Strong

Retailers rely on the holidays for a huge portion of their sales, and even a big-box warehouse-club business like Costco Wholesale (COST 1.01%) that has many of its shoppers come in every week to get groceries and other staples depends on the massive gift-giving that happens every December. Last quarter, Costco said that its Thanksgiving weekend sales went well, but now investors want to know how the remainder of the holiday season went for the retail giant.

Those who watch Costco will get that chance on March 7, when the company will issue its fiscal second-quarter financial report. Investors fully expect strong performance from the big-box warehouse store, but they also want to see evidence of sustainable growth for the remainder of the fiscal year and beyond. Let's take an early look at what Costco's likely to tell its shareholders and how things are going for the retailer, more generally.

Image source: Costco.

Key stats on Costco

Data source: Yahoo! Finance.

Can Costco keep gaining momentum?

Investors have become much more optimistic about the likelihood that Costco will post better earnings. In the past three months, the company's boosted its fiscal second-quarter projections by 5%. Even larger gains for the full 2018 and 2019 fiscal years point to an overall recovery for the retailer. The stock has responded in kind, gaining 10% since late November.

Costco's fiscal first-quarter results showed that the holiday season got off to a good start. Revenue was higher by 13%, with comparable sales climbing 7.9% from year-ago levels. U.S. results were even better, with comps growth of 8.7%. Rising penetration of Costco's digital efforts were evident from a 42% rise of e-commerce comparable sales. Fee-related revenue was higher by nearly 10%, with the positive impact of midyear membership rate increases during 2017 helping to lift that key contributor to profitability.

Since then, we've already gotten monthly sales figures that show Costco's more recent trends. In December, Costco saw huge gains, with revenue rising 14% on overall total company comparable-sales increases of 11.5%. Even without the benefit of a weaker U.S. dollar, December comps were up 8.8%.

Yet that stronger trend abruptly came to a halt in January, when adjusted comps gained just 2.9%. Costco blamed a shift in the calendar for part of the slowing growth, but even accounting for the movement in the New Year's holidays, both in the U.S. and in the lunar year as celebrated in China, comparable-sales gains of 6.4% showed some slowing from recent figures.

Costco will have a golden opportunity to pick up more market share in the coming months, as a prime competitor makes a decision to exit partially from the space. Walmart's (WMT -1.75%) Sam's Club hasn't been able to match Costco's performance in the warehouse-club space, and the megaretailer's strategic decision to shutter about a tenth of its existing stores in the U.S. could allow Costco to expand its network domestically even further. Moreover, some Costco locations that are currently near Sam's Club stores that are closing might well pick up additional business once customers can no longer choose either of the two.

Costco has also answered fears about its ability to retain members. When fee hikes took effect, some bearish investors worried that it would prompt some customers to discontinue their memberships. Yet Costco hasn't seen that impact, with retention rates remaining in the high-80% range worldwide, including 90% in the U.S. and Canada. Total members are likely to climb to more than 50 million households, showing the power of the Costco brand.

Coming into the March 7 report, Costco investors will want to pay close attention to the ongoing strategic discussion about how the retailer can keep defending its territory against other warehouse retailers and online e-commerce competition. So far, Costco has done a good job of keeping positive momentum, but investors will want to see evidence that its efforts will keep revenue and profits moving higher throughout 2018 and beyond.