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What Investors Should Look For in Costco's Q3 Report This Week

By Anders Bylund - May 24, 2020 at 10:23AM

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The warehouse retailer is navigating some stormy seas right now, but the long-term outlook should be stable.

Warehouse shopping giant Costco (COST 0.52%) is gearing up for a third-quarter earnings report on the evening of Thursday, May 28. Here's what investors should expect from this business update, which covers a period starting on Feb. 17 -- at the very beginning of the COVID-19 health crisis.

What analysts say

  • Buy, sell, or waffle? Forty-one analyst firms are offering a rating of Costco's stock today, and they absolutely love it. A single "underperform" rating is matched with 11 "hold" grades and 19 "buy" recommendations of various strength. Overall, Wall Street sees Costco as a strong buy right now.
  • Revenues. Your average analyst expects Costco's third-quarter sales to land near $37 billion, 7% above the year-ago period's result.
  • Earnings. Adjusted earnings are expected to stop in the neighborhood of $1.95 per share, representing a 3% year-over-year increase.

Two analysts have raised their earnings estimates over the last 30 days while 10 firms lowered their earnings targets instead. Revenue estimates have seen a similar trend, weighing two increased estimates against 12 servings of lower expectations.

A young woman carries shopping bags in the summer sun.

Image source: Getty Images.

What management says

Like most of the leading names in the retail industry, Costco provides monthly sales trend updates. Adjusted global net sales for comparable stores, excluding gasoline, rose 11.7% in February, followed by a 12.3% uptick in March as consumers and businesses stocked up on staples from Costco ahead of the brewing coronavirus storm.

That uptrend broke in April, where stay-at-home orders and social distancing restrictions resulted in 0.5% lower comparable-store sales instead. A 19% drop in foot traffic was nearly matched by an increase of 18% in average order sizes.

E-commerce revenues followed a distinctly different path. Online sales increased by 23% year over year in February, accelerating to a 50% jump in March and 88% higher sales in April.

What management does

Costco's profit margins have been skimpy but stable for many years:

COST Gross Profit Margin (Quarterly) Chart

COST Gross Profit Margin (Quarterly) data by https://ycharts.com">YCharts

Revenue growth does the heavy lifting for Costco's investors in the long run. Adjusted earnings have tripled over the last 10 years thanks to a doubling of the company's top-line sales:

COST Revenue (TTM) Chart

COST Revenue (TTM) data by YCharts

What one Fool says

Costco is one of those ultra-stable winners you can buy today and hold forever, never losing a minute of sleep worrying about that investment. The COVID-19 crisis presents a mixture of challenges and benefits to Costco's financial results in the short term, but it will all boil down to a forgettable blip when Costco shareholders look back at this moment from a vantage point of 2025 or 2030.

Take the quarterly figures in this report with a grain of salt and keep an eye open for management comments on Costco's long-term business trajectory.

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