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How Costco Wholesale Aims to Keep Climbing

By Dan Caplinger - May 26, 2015 at 1:03PM

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Investors want proof of the warehouse retailer's continued ability to grow.

It's hard to find a more innovative example of retail prowess than warehouse big-box giant Costco Wholesale (COST 0.23%). With impressive growth stemming from a loyal customer base and extremely low-priced offerings, Costco has brought more shoppers in the door and kept them coming year after year. At the same time, the company has developed a well-earned reputation for treating its employees well even as its supports its stores' local communities and gives customers the deals they want. On Wednesday, Costco will release its fiscal third-quarter financial report; with the company's share price having slipped back slightly, investors will want to see signs that the warehouse retailer remains on track for the foreseeable future. Let's look at what Costco is likely to say in its report.

Stats on Costco

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$26.64 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

What should you expect from Costco earnings?
In recent months, investors have had mixed views on Costco earnings. They cut their views on the most recent quarter by a penny per share, but boosted their expectations for the full fiscal year by more than 1%. The stock has given up a bit of ground, though, falling about 2% since mid-February even after climbing early in the quarter to new all-time highs.

Costco's latest quarterly report sustained the company's trend of giving investors most of what they want. During the fiscal second quarter, sales grew 4.3%, but profits soared 29% with help from some one-time items. The company's membership model continued to prove itself, with Costco collecting $582 million in membership fees during the quarter and helping to shore up its overall financial results with the resulting high-margin revenue.

Yet some investors are likely concerned about Costco's more recent results. March sales were down from a year ago, with flat comparable-store sales in the U.S. and a 9% plunge internationally adding up to drive overall comps down 2%. Even after adjusting for the downward impact of lower gasoline prices and a strong dollar, an adjusted comps gain of 4% was not as strong as investors have seen recently. April sales were much stronger, with 2% total growth coming from a 7% gain in adjusted comparable-store sales. Again, though, currency and gasoline-related effects hamstrung growth, particularly internationally.

Image: Costco.

Even with those concerns, though, Costco shareholders have to be happy about the way the retailer is looking after their investment. In April, the company said it would increase its dividend by almost 13%, paying shareholders $0.40 per share each quarter beginning this month. At the same time, Costco replaced its expiring stock buyback program with a newly authorized share repurchase initiative, giving the company the right to buy back as much as $4 billion in stock over the next four years. Shareholders should note, though, that even though Costco had a $4 billion program in place in recent years, it only used about $1.5 billion, leaving the majority untapped and demonstrating that a buyback authorization doesn't necessarily mean a company will spend all the money.

In the Costco earnings report, it will be important to focus on several items. First, Costco needs to keep bringing new members in the door to bolster its overall growth. Second, Costco should try to squeeze more money from its shoppers, particularly in newer stores. Finally, Costco should use its strong reputation to keep bringing in high-quality merchandise that will draw existing and new members into stores time after time. If it can execute on its basic strategy, then Costco Wholesale could resume its positive momentum and push its shares higher.

Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Costco Wholesale. The Motley Fool owns shares of Apple and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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