Investors have some big questions heading into Costco's (COST -0.55%) fourth-quarter and full-year earnings report. In just a few days, the warehouse giant will reveal detailed sales and profit trends while commenting on its outlook for the final months of fiscal 2021.
We already know the chain saw robust customer traffic through the end of its fiscal year in late August. But Thursday's announcement will show how much pricing pressure the retailer endured. Wall Street might even get an update on management's thinking around a likely membership fee increase sometime in fiscal 2022.
Let's take a closer look.
Image source: Getty Images.
Prices and costs
Costco already revealed in early September that it ended its fiscal year with a bang. Sales rose 9% in August and for Q4. Comparable-store sales increased 13% for the full 2021 fiscal year, putting the retailer ahead of peers like Walmart (WMT -0.65%) and Kroger (KR 0.56%).
What we don't know yet is how significantly Costco's business was pressured by pricing challenges. Kroger announced recently that its profitability fell as the supermarket giant kept some prices low even as inflation pushed costs higher.
Costco aims to be a price leader in the industry, so it might report even more of a gross margin pinch. But keep in mind that the warehouse club gets most of its earnings from subscriber fees, meaning it can operate at significantly lower merchandise margins than its rivals.
COST Gross Profit Margin data by YCharts.
Subscriber metrics
Costco reports sales figures monthly, but investors have to wait for its quarterly earnings reports to see important subscriber metrics. We'll find out on Thursday how many new members the chain attracted, including those who opted for its premium tiers. Membership fee income, which accounts for most of its earnings, should show robust growth, as shoppers continued to spend freely through late August.
Keep a close eye on Costco's renewal rate. That metric has been hovering around all-time highs of 91%, reflecting deep satisfaction with its selection, pricing, and multichannel selling platform. Another strong showing here would imply healthy momentum heading into the crucial holiday shopping season.
Looking ahead
The management team might highlight supply chain challenges for the rest of the year, given shipping bottlenecks in the industry today. The most likely impact of those issues would be depressed earnings as Costco spends more cash on freight to keep the right levels of inventory.
On the other hand, Wall Street is eagerly looking forward to hearing about a potential increase in Costco's annual membership fee, as a boost there translates directly into higher earnings.
The retailer typically hikes subscription fees every few years, and shoppers might be receptive to the next increase in today's inflationary atmosphere. Costco's scale allows it to offer significantly lower prices in an environment like that, after all, making a membership more valuable.
In any case, look for Costco to make bullish comments about its growth initiatives, including adding new warehouses in the U.S. and international markets, expanding its home delivery network, and gaining share in niches like fresh produce, consumer electronics, and home furnishings.
