Please ensure Javascript is enabled for purposes of website accessibility

Will Costco Wholesale End Its Year on a Positive Note?

By Dan Caplinger - Sep 25, 2015 at 3:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The warehouse retailer has a lot going on but has worked hard to sustain its growth.


Source: Costco.

Changing the face of retail is something that countless companies have strived to achieve, but warehouse retailer Costco Wholesale (COST -0.87%) is one of the few that has actually rached that goal. Thanks to its novel approach to the business, Costco has millions of paying members willing to reup their memberships year in and year out. Next Tuesday, Costco will release its fiscal fourth-quarter financial report, and investors are hoping that the company can sustain its momentum from the previous quarter and keep weathering the storm that recent stock market volatility has brought to some of its peers. Let's take a closer look at Costco's prospects to close in 2015 fiscal year and what might lie ahead for the retailer.

Stats on Costco

Analyst EPS Estimate

$1.66

Change From Year-Ago EPS

5.1%

Revenue Estimate

$36.34 billion

Change From Year-Ago Revenue

2.3%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can Costco earnings keep moving upward?
Costco has generally sustained investors' belief in its earnings growth, with the consensus forecast for full-year 2015 and 2016 earnings per share falling just a single penny over the past few months. the fourth investors have had mixed views on Costco earnings. The stock has done a good job of holding its own in a tough market environment, rising 5% since late June even as the S&P 500 is down almost twice that much.

You can see evidence of Costco's resiliency in its fiscal third-quarter report from May. Even though the company has struggled to create top-line growth, much of the headwind on that front comes from the fact that plunging gasoline prices have dramatically reduced the dollar amount of revenue that Costco gets from its station operations. Rises in earnings have been much more robust, and even though it saw some weakness in its membership-fee growth, measures aimed at improving business efficiency helped take up some of the slack.

One way that Costco has consistently boosted its popularity is by identifying key trends in the marketplace and aiming to meet demand for products before many shoppers even start to move in that direction. For instance, Costco has become the largest retailer of organic grocery products in the U.S., surpassing specialty retailers while offering what many customers perceive as greater value for their money. Costco's scale gives it the ability to negotiate from a position of strength with suppliers, and that helps it deliver on its commitment to keep prices low while avoiding situations in which it would have to take loss leaders.

Another advantage that Costco can point to is its favorable treatment of its workforce. Competing retailers are scurrying to boost their minimum wages in order to head off potential legislation that would impose higher labor costs involuntarily, and investors in those companies have responded with nervousness about the impact on overall overhead. Yet Costco was ahead of the curve in paying its employees better than its peers, and as a result, it doesn't face the same pressure as those that are racing to catch up.

Still, Costco knows it has work to do to stay on top of its game. In particular, as shoppers become more used to using mobile and online methods to do their shopping, Costco has identified its e-commerce channels as a key source of growth. At the same time, though, the warehouse retailer knows that it can't stray too far from the strategy that brought it so much success, and so Costco will have to keep focusing on ways to attract existing and potential new members into its physical store locations.

In the Costco earnings report, be sure to look beyond the headline numbers to take into account volatile factors like gasoline sales. With so many dramatic shifts in the marketplace, it's more important than ever to dig down and look at the core sources of business that retailers like Costco bring in. As long as it can continue to make its members happy, Costco should be able to extend its long-term growth trend well into the future.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$433.91 (-0.87%) $-3.80

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
322%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.