Costco Wholesale Corp (COST -2.92%) has proven itself to be a winner for both shoppers -- helping them to save money -- and investors -- helping them to make money -- over time. The company is known for its $1.50 hotdogs, $5 rotisserie chicken, and a wide variety of grocery and general merchandise sold for rock bottom prices. Costco's earnings have soared into the billions of dollars, and the stock price has followed, advancing about 180% over the past five years.
Like others in the retail space, though, Costco has faced a challenge this year, and that's President Donald Trump's tariffs on imports. Retailers generally source various products abroad, meaning they're responsible for paying tariffs as these imports enter the U.S. Costco spoke of its strategy in its most recent earnings report, back in May, and has made significant efforts to minimize tariff pressure -- for example, sending foreign-produced goods to non-U.S. stores and sourcing more items locally. Investors will be monitoring how this impacts revenue in the months and quarters to come.
And that's why Costco's next earnings report could be a key moment for the company and investors. Considering Costco's successes so far -- pre-tariffs and during today's tariff environment -- should you buy the stock before the Sept. 25 report? Let's find out.
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Costco's worldwide footprint
First, let's take a look at the Costco story so far. The company operates more than 900 warehouses worldwide, with about 600 of those in the U.S., as well as an e-commerce operation in the U.S., Canada, and several other countries.
Last year, Costco generated more than $200 billion in revenue, thanks to its sales of food, essentials, general merchandise, gasoline, and other products and services. The company's strategy is to buy items in bulk so that it can resell them to you at ultra-low prices. For this reason, Costco has very low margins on the items it sells -- for example, in the recent quarter, merchandise costs topped $54 billion, while net sales totaled $61 billion.
So how does Costco make money? Through its membership fees. This means the company generates revenue from you before you even set foot in the warehouse to make a purchase. Membership fees are high margin, as it doesn't cost the company much to offer you a card, and that's why these fees actually drive profit at Costco. In the recent quarter, membership fee revenue was $1.2 billion, and net income totaled $1.9 billion.
Executive level membership
Costco offers two membership levels, the standard one for $65 per year and the executive level for $130 annually. Executive level customers are standing out as a key growth driver as they represent almost half of all memberships and more than 70% of global sales.
And one of the most important points of all is Costco has maintained a more than 90% membership renewal rate worldwide quarter after quarter. This offers us a certain degree of visibility on revenue to come.
Now, let's consider the earnings report ahead. Costco has reported positive earnings per share surprises in three of the past four quarters, and the warehouse giant has established a long track record of revenue and earnings growth. Costco, as mentioned, has made efforts to reduce the impact of import tariffs, and the company's reliance on imports isn't alarming: About one-third of U.S. sales are imports, and imports from China represent about 8% of U.S. sales.
On top of this, Costco's profitability isn't highly linked to the items it sells -- and this offers it more room to maneuver when it comes to establishing prices. So, it may be able to maintain lower prices in a tariff environment more easily than a company that generates most of its profit through the sales of goods.
All of this means there's reason to be optimistic about Costco's ability to manage the tariff environment and continue to excel over the long run. If, on Sept. 25, the company offers investors some positive signs that support this idea, the stock could advance.
Time to buy?
So, getting back to our question -- should you buy the stock before Sept. 25? Costco today is trading for 48x forward earnings estimates. Though this is near its lowest level in a year, the stock still isn't cheap compared to other retailers -- but its business model, based on membership, and its customer loyalty, make it worth the premium.
But it's also important to remember that, as a long-term investor, you don't have to time the market to buy a stock before a particular date -- short-term share price movements aren't likely to impact your portfolio over the long run. And that's why it's a great idea to buy Costco stock before or after its upcoming earnings report.
