Categories Consumer, Earnings

Earnings Preview: Costco to continue the momentum in Q3 despite tough macros

The stock price of the warehouse retailer Costco Wholesale Corporation (NASDAQ: COST) touched a new all-time high of $251 this week. The primary reason for the rally could be the strong comp-sales reported for the April month. The retailer’s stock has increased above 21% this year backed by consistent growth compared to its peers.

Costco is scheduled to report its third-quarter results on Thursday after the bell followed by a conference call with analysts. Analysts are expecting the top line to improve 7% to $34.67 billion while earnings to be $1.82 per share compared to $1.7 in the prior year period.

An infographic on Costco's second quarter 2019 earnings results
Costco Wholesale Q2 2019 Earnings Infographic

Investors expect Costco to report solid results mimicking its peers Target and Walmart, which reported solid results in the recent quarter.

The retailer has reported a comp-store sales growth of 5% or above in the last two years. It’s worth noting that Costco has achieved this stellar growth amidst multiple headwinds impacting the retail industry. The most impacted are the firms which are located in malls like L Brands, Lowe’s, Gap and J.C. Penney.

The full-price retailers have been hurt by reducing footfalls in malls, intense competition from the e-commerce giant Amazon (AMZN), hike in costs due to the ongoing trade war between the US and China and changing consumer habits. Hence, it’s inevitable for brick-and-mortar firms to come up with some USP which would bring back customers to their stores.

Membership Fees: Key to Profits

The most important metric when it comes to Costco is membership stats. The retailer sells all kinds of merchandise to its members through its warehouses at lower prices, which increases customer visits and increased spending per customer.

In addition, the annual subscription fee paid by the members brings in stable revenues to the retailer, unlike its peers which solely depend on sales growth.

At February end, membership fees rose 7% to $768 million. Total members stood at 96.3 million, of which 52.7 million are paid members. Most importantly, renewal rates in the US were 91% and 88% across the globe. Renewal rates needs to be at healthier levels as this would bring in stable revenues via membership fees and more spending from customers helping the top line.

Since Costco plays the price game offering its members the lowest price possible, it operates on thin margins when it comes to merchandise sales. Membership fees are a major contributor to earnings which acts as a tailwind to Costco regardless of tough macros which has impacted its peers. Hence, membership growth is the most important metric to watch followed by same-store sales growth and headline numbers.

When it comes to headwinds, investors would be eager to know from the company, how the recent hike in tariffs for Chinese imports would impact the sales.

The warehouse retailer could face pressure on the margins front if there is a rise in costs due to the trade war. It needs to find alternatives in order to reduce the impact of tariffs to keep the momentum intact in 2019.

Q2 Performance

In the second quarter, Costco reported a 26% jump in earnings helped by rising traffic and e-commerce sales. Comp-store sales grew 5.4% backed by solid US sales of 7.4%.

Revenues rose 7.3% to $35.4 billion but slightly missed the estimates. The retailer had 770 warehouses globally with 535 located in the US. Online sales continued its healthy growth reporting 20.2%.

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