Will Costco Wholesale Earnings Extend the Winning Streak?

Source: Costco.

Warehouse-retail giant Costco Wholesale (COST -0.24%) has wowed investors for years with its solid, dependable growth. As investors prepare for its fiscal second-quarter financial report on Thursday, Costco has an opportunity to keep its strong momentum going from the past couple of quarters, in which the big-box retailer has demonstrated the ongoing success of its business model.

Costco's reputation comes from multiple fronts, with impressive long-term returns being only part of the equation. Between its unusual membership-driven business model, its close and friendly relationship with its employees, and its emphasis on offering rock-bottom prices, Costco has transformed the way Americans shop. Let's take an early look at what Costco is likely to report this quarter and what it means for the future.

Stats on Costco

Source: Yahoo! Finance.

Can Costco earnings keep topping expectations?
Analysts have maintained a fairly rosy view on Costco earnings, although they've cut back their fiscal year 2016 projections by less than 1% over the past few months. The stock has kept rising, though, and is up 9% since late November.

Costco's recent earnings results have been upbeat, which comes as a welcome change to investors who worried about the company's growth prospects early last year. During the fiscal first quarter, sales climbed more than 7% to $26.28 billion, with comparable-store sales climbing 5% companywide and posting 7% growth excluding the impact of falling gasoline prices and foreign exchange fluctuations. Net income jumped 17%, topping what most investors had expected to see.

Since then, growth in comps has remained at sustained levels, excluding the impact of gasoline and foreign exchange, with 8% comps in December and 7% comparable-store sales growth in January.

Another sign of Costco's recent success came early last month, when it announced its latest special dividend. Costco's regular dividend is relatively modest, equating to about a 1% yield at current prices. Yet the $5 per share special dividend pushes the total yield up to 4.3%, and the total payout of $2.2 billion is actually higher than Costco's profit from the past year.

Costco tapped the credit markets to finance part of the dividend, taking advantage of rock-bottom interest rates to increase the leverage on its balance sheet and potentially accelerate earnings growth in the future. Moreover, as CFO Richard Galanti said after the announcement, the move rewards shareholders while "preserving financial and operational flexibility to grow our business globally, and allowing for ongoing dividend and share repurchase activities."

Since then, most of the attention Costco has received has to do with the company's exclusive credit card arrangement. For 16 years, American Express cards were the only credit cards that Costco accepted, forcing customers without AmEx cards to use debit cards or other forms of payment. But last month, Costco brought that relationship to an end, and this week, Costco announced a new partnership with Citigroup (C 1.41%) and Visa (V -0.59%) under which Citigroup will become the exclusive issuer of Costco credit cards. Visa will process payment transactions beginning in April 2016. Analysts believe that Visa might get as much as $100 million from the relationship, but Costco investors can also expect gains from the move.

In the Costco earnings report, be sure to watch for any signs of acceleration or deterioration in the retailer's recent results. Yet going beyond the report to look at the long-term impact of strategic shifts like the change in the credit card relationship and the special dividend will also be important in order to get a better sense of where Costco sees itself going in the years ahead. As investors get more optimistic about Costco's future, the company will have to work harder in order to achieve its full potential and keep those investors satisfied.