Costco Earnings Preview- High expectations for the big box giant

Costco Wholesale Corporation (COST) is set to report its Q4 earnings after the market close today, September 26. Analysts are expecting the company to post earnings per share (EPS) of $5.08 and revenue of $79.91 billion, according to FactSet consensus estimates. Given Costco's reputation as a bellwether for consumer spending, this earnings report will be closely watched by investors as a critical read on the health of the consumer, particularly in a challenging retail environment.

One of the key areas to watch in Costco’s earnings report will be comparable store sales (comps), which are a significant indicator of the company’s operational performance. Although Costco provides monthly revenue updates, reducing the likelihood of major surprises on the top line, the trend in comp store sales will be crucial. Recent reports have shown strong performance in the U.S., with August comps up 5%, slightly below estimates, but with U.S. comps excluding fuel and currency up 6.7%, above expectations. This trend suggests that Costco continues to gain market share, especially in its core U.S. market.

The trend in revenue growth year-over-year (Yr-Yr) will also be a focus. Over the past four quarters, Costco has maintained solid revenue growth, ranging from 5.7% to 9.5% year-over-year. Analysts will be keen to see if Costco can sustain this momentum, especially given the recent membership fee increase, which could provide a further boost to revenue. Additionally, the company's ability to drive non-foods category sales, particularly through its "treasure hunt" strategy with discounted gift cards and premium products like jewelry, will be an area of interest.

Analyst commentary ahead of the earnings release has been mixed. While Redburn downgraded Costco from Buy to Neutral, citing concerns about valuation—highlighting that the stock trades at approximately 50x FY25 EPS— Oppenheimer remains optimistic. The firm's recent store checks indicated an improvement in Costco’s product offerings, particularly in non-foods categories, which have seen strong performance despite a mixed discretionary spending environment. Oppenheimer raised its price target on the stock from $905 to $950, expecting continued momentum in sales and potential catalysts like a stock split.

On September 24, Truist downgraded Costco (COST) to a Hold rating while maintaining its price target at $873. The downgrade was based on concerns that recent changes, such as the shift towards scanning IDs on entry and packaging changes to their chickens, could introduce some sales friction. While Truist acknowledged that Costco’s business remains strong, gaining market share across various retail segments and benefiting from high barriers to entry, they noted that key catalysts are now in the past. Additionally, the stock's valuation, which has risen approximately 60% over the past 12 months and is now trading at about 54 times forward twelve-month EPS, leaves little room for error, according to Truist.

On July 11, Costco (COST) announced a long-anticipated increase in its membership fees, which will take effect on September 1. The price of an individual membership will rise from $60 to $65, and an executive membership will increase from $120 to $130. This marks a significant development, as Costco's membership fees are a crucial driver of its earnings, even though they represent only a small portion of total revenue (1.9% in Q3, generating $1.1 billion). Despite the positive impact this price hike is expected to have on earnings, Costco's stock traded lower following the announcement, likely due to a "sell-the-news" reaction as investors had been anticipating the increase for some time, and the stock had already priced in the expected hike.

Costco reported solid Q3 results, beating both top and bottom line estimates, but despite this strong performance, its shares traded lower. The sell-off can be attributed to the "victim of its own success" phenomenon, where investors had set very high expectations following impressive comparable sales reports for March and April. The stock had already rallied by 13% in May, reaching record highs, leading to today's sell-the-news reaction. Although the EPS beat wasn't as spectacular as some might have hoped, Costco's overall performance remained robust, with comparable sales growing by 6.5% on an adjusted basis, largely driven by a 6.1% increase in store traffic.

During the earnings call, led for the first time by new CEO Ron Vachris, Costco highlighted improvements in demand for discretionary products, with strength in categories such as toys, tires, health and beauty, and lawn and garden. The company also emphasized its focus on enhancing digital capabilities, which already appears to be yielding results as eCommerce comps surged by 20.7% in Q3, supported by a 32% increase in new app downloads. Despite the leadership change, Costco's strategic direction remains consistent, with ongoing investments in technology and a potential membership fee increase on the horizon, which should continue to bolster the stock in the future.

Overall, Costco’s Q4 earnings report will not only provide insights into the company’s performance but also offer a broader read on consumer behavior. With shares hovering around all-time highs, the report will need to meet or exceed high expectations to sustain the current valuation. Investors will be closely monitoring the guidance provided for the coming quarters, especially in light of the recent membership fee increase and ongoing macroeconomic uncertainties.