Costco Stock Looks to Get Its Mojo Back

Costco Wholesale (COST -0.55%) has been one of the best-performing retailers over the years, and investors in its stock have been duly rewarded with solid gains. Yet even though the warehouse specialist has managed to hold its own in a turbulent market over the past few months, shareholders have seemed nervous about whether Costco would be able to repeat its strong holiday performance from 2017 and keep overcoming the challenges that stem from online-only retailers looking to eat into its market share.

Costco is set to release its fiscal first-quarter earnings report on Thursday, Dec. 13, and investors have high expectations for what they'd like to see from the big-box retailer. Given the turbulence in the financial markets lately, anything short of success could be problematic for Costco stock as it tries to regain its upward momentum from earlier in 2018.

Key stats on Costco

Data source: Yahoo! Finance.

How Costco has fared lately

Sentiment surrounding Costco earnings has been pretty positive recently. Those following the stock have boosted their full-year projections for both fiscal 2019 and 2020, and while the increases have been modest, they've still recognized the earnings power of the warehouse retailer. However, the stock hasn't followed suit, falling 4% since early October.

Costco's fiscal fourth-quarter results were a big cause of anxiety for many investors. Strong total-company comparable sales growth of 9.5% largely sustained the company's recent pace of growth, and net income rose double-digit percentages from year-earlier levels. Costco continued to show strength on the e-commerce front, boosting its revenue from online sources by 26%. Moreover, membership fee revenue continued to play a key role in the retailer's growth, rising 6% and coming close to the $1 billion mark for the quarter. Yet some investors were nervous about flat year-over-year operating income as well as some issues surrounding internal controls over Costco's financial reporting.

Image source: Costco Wholesale.

Even so, Costco has been fundamentally sound throughout the fiscal first quarter. During September, comps were higher by 8.4%, with a nearly 29% boost in e-commerce. Gasoline prices and foreign exchange impacts boosted those numbers to some extent, but even on an adjusted basis, comps were higher by 7.3%. October gains were just a bit weaker, with adjusted comps rising 6.6% on a 20% gain in e-commerce. However, the key November period was especially strong, with adjusted comps growth of 8.5% and a whopping 34% rise in revenue from online sources. Traffic has played a key source in pushing comps higher, but a rise in average transaction figures has also added to Costco's success.

One interesting aspect of Costco's success is where it's getting its best business. Costco said that in November, hard-line items like automotive and sporting goods saw the best sales growth, coming in around the mid-teens on a percentage basis. Soft-line goods like small appliances, home furnishings, and apparel weren't far behind, rising low double-digit percentages.

At this point, investors looking at the Costco earnings report will want to focus their attention on how the warehouse retailer intends to stay so far ahead of its competitors. With many big-box retailers having to deal with pressure on their margins, Costco has thus far been able to use its sourcing and pricing advantages to stave off negative trends that would affect its bottom line adversely. If consumers remain healthy going into the early holiday season -- and the November sales numbers suggest that the retailer's gotten a good start -- then Costco could be in position to finish the calendar year strong and build momentum for fiscal 2019.