Costco Stock Has a Lot to Prove This Week

As a long-time Costco member and avid shopper, I've always been impressed by the company's ability to deliver high-quality products at competitive prices. However, as an investor, I've been hesitant to jump on the Costco bandwagon due to its relatively high stock price. This week, however, Costco has a lot to prove as it reports its fiscal second-quarter earnings, and investors are eagerly awaiting the results.

Costco's stock price has been on a tear this year, up over 14% compared to a relatively flat S&P 500. The company has a history of landing ahead of the market's quarterly profit targets, but with expectations already modest, Costco may have to perform better than that to keep its recent upticks. The market tends to have a good read on Costco, at least on the top line, because the retail stock bellwether puts out monthly updates for the first two months of a reporting period.

Analysts are modeling a profit of $4.10 a share for the quarter, which is a modest increase from the previous quarter. While Costco has landed ahead of the market's quarterly profit targets over the past year, they have all been just single-digit percentage beats. The market tends to have a good read on Costco, at least on the top line, because the retail stock bellwether puts out monthly updates for the first two months of a reporting period.

Costco has already said that total sales rose 9.2% in December, accelerating to a 9.9% jump in January. Domestic comps also stayed north of 9% in each of those reports, with e-commerce sales clocking higher and its international performance languishing relative to its home market. Will February be bad enough to drag fiscal second-quarter sales down to the 7.8% increase that analysts are projecting?

As for the bottom line, analyst estimates have been inching higher since the last financial update. Wall Street pros went from eyeing a quarterly per-share profit of $4.01 three months ago to $4.05, $4.07, and now $4.09 in the subsequent months. Food retail has seen some inflationary spikes in products including eggs and coffee, but Costco has a track record of managing the ups and downs of retail pricing. It would also be ironic if margins are getting squeezed after Costco pushed out a $5 to $10 increase for its annual membership plans in September.



The increase itself isn't likely to have rattled Costco's rolls. Increasing its entry-level Gold Star plan from $60 to $65 and its business-geared Executive tier from $120 to $130 is actually less than many bulls expected. It's the smallest increase on a percentage basis of the eight hikes it has pushed out since opening its doors back in 1983. It had also been seven years since the last membership boost, the longest gap between hikes that had previously happened between two and six years apart.

Costco can't afford a miss. The stock isn't cheap at 57 times this fiscal year's net income projection or even 52 times fiscal 2026's target. The shares have outpaced the fundamentals over the past year, but the same can be said for even longer stretches of time. Costco has earned the right to a hefty market premium. It has earned its all-weather stripes. There was only one year -- a 1.5% decline in fiscal 2009 during the Great Recession -- in which Costco didn't deliver positive top-line growth in its more than three decades of public trading. CEO Ron Vachris has only been in the top spot for a year, but he's a Costco lifer who began working at the company as a forklift operator 40 years ago -- the chain hasn't skipped a beat in the handoff.

Betting against Costco because the stock isn't as cheap as its value proposition for members hasn't paid off for the naysayers in the past. Costco should be able to prove its worth to the market on Thursday afternoon, too.