Will Costco Earnings Keep Crushing Wal-Mart and Target?

Costco Wholesale (COST 0.84%) will release its quarterly report on Wednesday, and investors have remained optimistic about the stock, sending it to new all-time highs late last month. Yet with competition remaining fierce against Target (TGT -0.71%) and Wal-Mart (WMT 1.02%) as well as other major retailers both with physical stores and online commerce, Costco can't afford to slow down if it wants to keep earnings moving higher.

The warehouse retailer's secret to success has been its innovative membership model, in which customers pay for the privilege to shop in Costco stores. With a reliable stream of recurring revenue from membership fees, Costco can afford to offer products at lower prices than retailers without that revenue stream, giving it a key competitive edge. But as Wal-Mart, Target, and other rivals get savvier about the business, will they find an answer that makes Costco look obsolete? Let's take an early look at what's been happening with Costco Wholesale over the past quarter and what we're likely to see in its report.

Stats on Costco Wholesale

Source: Yahoo! Finance.

Will Costco earnings bounce back from last quarter's surprise?
In recent months, analysts have reined in their views on Costco earnings, cutting $0.02 per share from their estimates for the quarter ended in November and $0.08 per share from their projections for fiscal 2014 and 2015. The stock has kept doing well, climbing 7% since early September.

Costco actually disappointed investors with its report for the quarter ended in August, with a rare miss on the earnings front. Sales rose only 1%, although comparable-store sales jumped 5% due to a big increase in customer traffic, considerably outpacing comps at Target and Wal-Mart. A 3% jump in membership fees to $716 million represented a huge portion of Costco's overall operating profit, and renewal rates continued to climb from their already-impressive levels. The report turned out to be a nonevent in terms of share-price movement.

Costco is so well established in the U.S. that many might think its high-growth days are over. But the company has ambitious expansion plans, expecting to open 36 new warehouse locations during the current fiscal year. With half of those stores going to international markets, Costco is looking abroad to cash in on its popular shopping concept, a move that it really hasn't made previously with its past domestic focus.

Yet one way that Costco tried to enhance its positive reputation involved not maximizing sales. Unlike Target and Wal-Mart, Costco decided not to open its doors on Thanksgiving Day, in just another sign of its dedication to its employees. With the controversy over low-income work and the minimum wage in recent months, Costco's attention to its employee base seems prescient in giving it another competitive advantage over its rivals. Moreover, the move is just one more sign of the flexibility that Costco's membership model gives the retailer that Wal-Mart and Target can't afford.

Still, the holiday season will be an essential part of Costco's annual performance, and figures on retail sales and consumer confidence could weigh on the retail industry's results. So far, Costco has managed to avoid most of the pressure that Target and Wal-Mart have seen on their financials, but that's no guarantee of future results.

In the Costco earnings report, look most closely at membership renewal rates. As long as people keep ponying up for annual membership, they're going to keep shopping at Costco. And as long as that happens, Costco will keep a key advantage over Target and Wal-Mart.

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