How to Play Costco (COST) Ahead of Q3 Earnings Release

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By Sumit Singh,

As Costco Wholesale Corporation (COST) gears up to unveil its third-quarter fiscal 2024 results on May 30 after market close, investors find themselves at a pivotal decision point, weighing the potential upsides and downsides of investing in this membership warehouse club operator.

Costco's strategic investments, customer-centric approach, merchandise initiatives and focus on membership growth have enabled it to navigate market turmoil effectively. These strengths have resulted in solid sales and earnings, positioning Costco as a resilient consumer defensive stock.

Analysts are optimistic about Costco's upcoming earnings. The Zacks Consensus Estimate for revenues stands at $58.1 billion, which indicates a notable 8.3% improvement from the previous year. Furthermore, the consensus estimate for third-quarter earnings per share has risen by a penny to $3.70 over the past 30 days, which suggests a 7.9% year-over-year uptick.

Well, the decision to invest in this Issaquah, WA-based company ahead of its first-quarter earnings release requires careful consideration.

Assessing Costco’s Pros & Cons

Costco stands tall as a dominant force in the warehouse retail sector, boasting a wide array of high-quality merchandise. Its distinctive membership-based business model and pricing strength differentiate it from traditional competitors. The company's emphasis on bulk sales and efficient inventory management allows it to keep prices low, making it a preferred shopping destination for budget-conscious consumers. This competitive pricing strategy helps Costco maintain steady store traffic and robust sales volumes. We expect a 4.6% and 4.4% jump in comparable sales in fiscal 2024 and 2025, respectively.

One of Costco's unique strengths is its membership-based business model. The company boasts high membership renewal rates, often exceeding 90%, which indicates strong customer loyalty and a steady stream of recurring revenues. Membership fees provide a stable income regardless of economic conditions. We anticipate Costco's total paid membership to reach approximately 76 million by the end of fiscal 2024, marking a 7% increase from fiscal 2023. Additionally, we estimate a 4.9% rise in total membership fees for the current fiscal.

Through meticulous market analysis and tailored offerings, Costco has expanded its footprint both domestically and internationally. With plans to open 30 new club locations in fiscal 2024, including strategic relocations, the company aims to further bolster its membership base. Operating e-commerce sites across multiple countries, including the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia, signifies its commitment to catering to diverse consumer preferences.

Backed by a robust balance sheet, Costco is well equipped to navigate cyclical downturns and capitalize on growth opportunities. Its consistent dividend increases, evidenced by a recent 13.7% rise, attract investors seeking stable income and growth prospects.

With a clear emphasis on delivering value-oriented offerings, Costco remains well-positioned for continued success in the dynamic retail landscape. However, it is essential to acknowledge the presence of certain headwinds, including underlying inflationary pressures and a high interest rate environment, which may pose challenges. Additionally, margins remain a critical area to monitor, with potential concerns stemming from any deleverage in the SG&A rate.

Costco Wholesale Corporation Price, Consensus and EPS Surprise

Costco Wholesale Corporation Price, Consensus and EPS Surprise

Unlocking Value in Costco

While Costco currently trades at a premium compared to industry peers, this elevated valuation is not without merit. With a forward 12-month price-to-earnings ratio of 47.61, surpassing the median level of 37 observed in the past year, Costco demonstrates its appeal to investors seeking growth opportunities. Moreover, when compared to the industry's forward 12-month P/E ratio of 29.84 and the S&P 500's ratio of 21.1, Costco's higher valuation reflects its position as a standout performer in the market.

The company's promising prospects and market potential further support its premium valuation. Moreover, the growth trajectory for Costco appears promising, with the Zacks Consensus Estimate for sales for the current and next fiscal year standing at $253.5 billion and $271.1 billion, respectively. These figures indicate year-over-year growth of 4.6% and 7%. Similarly, the consensus estimate for earnings per share is pegged at $16.04 and $17.36 for the same periods, which suggests an increase of 9.2% and 8.3%, respectively.

Shares of Costco have advanced 22.7% year to date compared with the Retail – Discount Stores industry’s rise of 12.9%.

What the Zacks Model Unveils

As investors prepare for Costco's third-quarter earnings, the question looms regarding earnings beat or miss. Our proven model does not conclusively predict an earnings beat for Costco this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. However, that’s not the case here.

Costco has a Zacks Rank #3 but an Earnings ESP of -1.05%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Despite the predicted earnings miss, long-term investors should consider the stock’s underlying strength.

Stocks With the Favorable Combination

Here are companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Bath & Body Works (BBWI) currently has an Earnings ESP of +5.23% and a Zacks Rank of 2. The Zacks Consensus Estimate for first-quarter fiscal 2024 earnings per share is pegged at 33 cents, flat year over year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Bath & Body Works’ top line is expected to decline year over year. The Zacks Consensus Estimate for quarterly revenues is pegged at $1.37 billion, which indicates a drop of 2.1% from the figure reported in the prior-year quarter. BBWI has a trailing four-quarter earnings surprise of 23.2%, on average.

Kohl's Corporation (KSS) currently has an Earnings ESP of +85.06% and carries a Zacks Rank #3. The Zacks Consensus Estimate for first-quarter fiscal 2024 earnings per share is pegged at 4 cents, which suggests a sharp decline from the year-ago reported number of 13 cents.

Kohl's top line is expected to decline year over year. The Zacks Consensus Estimate for quarterly revenues is pegged at $3.54 billion, which indicates a drop of 0.9% from the figure reported in the prior-year quarter. KSS has a trailing four-quarter earnings surprise of 84.2%, on average.

American Eagle Outfitters (AEO) currently has an Earnings ESP of +3.98% and a Zacks Rank #3. The company is likely to register an increase in the bottom line when it reports first-quarter fiscal 2024 numbers. The Zacks Consensus Estimate for quarterly earnings per share of 28 cents suggests a jump of 64.7% from the year-ago quarter.

American Eagle Outfitters’ top line is anticipated to rise year over year. The consensus mark for revenues is pegged at $1.15 billion, which implies an increase of 6.2% from the figure reported in the year-ago quarter. AEO has a trailing four-quarter earnings surprise of 22.7%, on average.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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