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3 Things to Watch in the Stock Market This Week

By Demitri Kalogeropoulos - May 27, 2018 at 10:31AM

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Costco is one of several big-name retailers set to announce earnings results during the shortened trading week ahead.

Stocks inched higher last week, with both the S&P 500 and the Dow Jones Industrial Average rising by less than 0.5% as some of the nation's biggest retailers announced positive first-quarter earnings results. The indexes are just slightly higher so far for the year with about seven months to go in 2018.

^DJI Chart

^DJI data by YCharts

The week ahead includes earnings reports from a few more major retailers, including Costco (COST -1.41%)Ulta Beauty (ULTA 2.24%), and lululemon athletica (LULU -0.71%). Below, we'll preview these highly anticipated announcements.

Costco's membership fees

Costco will announce its fiscal third-quarter results after the market closes on Thursday. So far, this has been an excellent year for the warehouse retailing giant. Sales jumped 7% over the last six months, which translated into significant market-share gains as rivals like Walmart have been growing at closer to 3%.

A shopper pushing a cart walks through a warehouse aisle.

Image source: Getty Images.

Walmart and other major retailers including Home Depot announced a slight slowdown for the first-quarter period, but Costco apparently bucked that trend. The company announced in early May that April's sales growth held steady at a healthy 7% rate.

There will still be plenty for investors to digest in Thursday's report, though, including profitability, along with updates on Costco's e-commerce business, membership sales pace, and subscriber renewal rates. Given the retailer's apparent success at packing its stores with customers this year, the outlook is bright for each of these important metrics.

Lululemon's profitability

Lululemon's shares have trounced the market so far this year as investors gained faith in its operating rebound. The yoga clothing specialist soared past management's targets over the key holiday shopping season thanks to the combination of a modest customer traffic boost and a 44% spike in e-commerce sales that, together, sent revenue up 11% in the period.

In contrast to many other brick-and-mortar retailers who are transitioning toward digital sales, Lululemon's profits aren't being pinched by this e-commerce shift. Instead, gross profit margin rose by 2 percentage points last quarter to pass 53% of sales for the full year. Operating margin hit a new high of 27.6% of sales, too.

The retailer is going through major changes in its executive ranks, with CEO Laurent Potdevin having abruptly stepped down in early February 2018 and a new CFO joining in late April. Details on that transition will capture most of investors' attention this week, but shareholders are likely to give Lululemon plenty of room to determine its next strategic steps as long as sales and profits keep marching higher.   

Ulta Beauty's 2018 outlook

Investors initially punished Ulta Beauty's stock after the beauty retailer warned in March that 2018 profitability won't be quite as high as management had hoped. But shares have rebounded nicely since then and are beating the market heading into the company's first-quarter report on Thursday.

A woman buying beauty products at a sales counter.

Image source: Getty Images.

Key metrics to watch will include customer traffic, which expanded at a strong 6% pace last quarter, and e-commerce sales, which spiked by 50% over the holidays. Investors will be looking for those gains to continue, but they'll mostly be focused on management's reading of the core makeup segment, whose slowdown has caused sales growth to decelerate for three consecutive quarters.

CEO Mary Dillon and her team have found ways to keep revenue churning higher with help from a popular loyalty program and exclusive product offerings in stores. Yet they've had to engage in more price promotions to keep inventory moving in a weakening sales environment. We'll find out on Thursday whether those price cuts were still required at the start of Ulta Beauty's fiscal 2018.

Demitrios Kalogeropoulos owns shares of Costco Wholesale and Home Depot. The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Costco Wholesale, Home Depot, Lululemon Athletica, and Ulta Beauty. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$532.20 (-1.41%) $-7.62
Ulta Beauty, Inc. Stock Quote
Ulta Beauty, Inc.
$390.03 (2.24%) $8.55
Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$316.98 (-0.71%) $-2.28

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

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