Judging by the company's performance for the past several years, Costco Wholesale (COST 0.17%) may look like a no-brainer stock to buy right now. When you factor in recent record Black Friday sales and a potential upcoming increase in the cost of a membership for the warehouse club retailer, it's not hard to understand why Costco stock is popular among long-term investors. The only real question for these investors is whether now is the right time to buy Costco stock.
Costco will report its earnings for the first quarter of fiscal 2023 (which ended Nov. 20) on Dec. 8. Should investors buy before the report's release, or should they wait to see if news from the report will create a better opportunity?
The state of Costco
Regardless of the latest report, Costco will likely remain a buy longer-term. A big clue to this assessment comes from the fact that the company releases net sales figures every month. Over each of the last three months, monthly net sales grew between 5.7% and 10.1% year over year.
Moreover, its loyal membership base and prospects for further expansion in the U.S. and abroad mean Costco likely maintains its growth trajectory for decades. Given that steady growth, one can understand why its stock significantly outperformed the S&P 500 over the last 10 years.
Why investors may want to buy now
Additionally, a couple of possible tailwinds have piqued the interest of investors. In mid-October, Walmart's Sam's Club raised its membership fees by 11% for new and renewing Club members.
That move led to speculation that Costco might follow suit. Its last membership increase occurred in 2017, and in an inflationary environment, such a prediction is understandable. Investors should also remember that membership fees are a primary profit source for Costco. Worldwide renewal rates stood at 90% at the end of 2022, and assuming renewal rates hold steady, any increase should boost the bottom line.
Furthermore, the holiday shopping season is off to a quick start. Adobe Analytics forecast that Black Friday sales exceeded $9.1 billion, a record level. Given Costco's history of rising sales in just about any economic condition, the retailer likely shared in the benefits.
The case for staying cautious
However, the upcoming earnings report brings significant uncertainties, even for a stable company like Costco. For one, investors need to remember that fiscal Q1 ended on Nov. 20. That means investors should not expect any updates on the recent Black Friday sales or the holiday shopping season.
The sentiment surrounding a membership fee hike is also mere speculation at this point. Yes, an increase is possible, and the stock may surge following earnings if Costco hikes membership fees. But if it decides to keep membership costs at current levels, traders may sell the stock in the near term.
Moreover, investors should remember that stocks trade on revenue and earnings expectations, as well as forecasts for future quarters. Even if Costco gives investors a solid report, an earnings expectations disappointment remains a possibility.
Another potential pitfall involves its 39 price-to-earnings (P/E) ratio, a multiple far exceeding the S&P 500 average of 21. High P/E ratios are not unusual for Costco. Still, the valuation increases the danger the stock will sell off on bad news, a factor that adds to near-term risks.
Should investors buy now?
Investors generally should consider Costco a long-term buy and when they buy in matters far less than if they buy in. The stock is likely to continue its upward trend regardless of the timing. But, given the current situation with the stock and with the economy, investors might want to hold off on adding positions until after the earnings release. Some information investors need to make an informed decision -- holiday shopping sales totals and the timing of the next membership price increase -- should gain greater clarity. Additionally, earnings reports are times when a company can release news on anything, making a stock's behavior after an announcement difficult to predict.
Costco stock is an excellent choice for its long-term investors. But to win with this retail stock, they might do better to buy based on its predictable growth rather than on the hopes surrounding one report.
