3 Things That Can Go Wrong for Costco on Wednesday

Exterior shot of a Costco Wholesale club.

Expect shares of the country's leading warehouse club operator to be on the move this week: Costco (NASDAQ: COST) reports financial results for its fiscal second quarter 2018 shortly after Wednesday's market close, and there's nothing like an earnings release to send a stock higher or lower.

There's a lot riding on this report given the stock's big gains over the past year, and there are several things that could go wrong. From stumbling competitors to lofty expectations, let's look a few of the things that might trip up Costco and its shareholders this week.

1. Peers have proven mortal this season

We've seen Walmart (NYSE: WMT) and Target (NYSE: TGT) take hits following their reports. Target opened lower on Tuesday morning after posting weaker than expected earnings. Sales were healthy, but its big digital initiatives come with hefty price tags. Walmart took an even bigger hit two weeks ago after it also warned that margins will be held back in the near term as it struggles to wring some profit out of its online operations.

Costco isn't a pure match with the country's two largest discount big box chains, but they have similarities. Walmart owns Costco's direct rival, Sams Club, and both store concepts have been ramping up their grocery offerings to compete with supermarkets and, to a lesser extent, warehouse clubs.

Costco has been investing in e-commerce, a segment where it continues to produce faster growth than the rest of the company. It hasn't been as aggressive on this front as Walmart (with its acquisition) or Target (which recently purchased Shipt), but its e-commerce sales still rose 43.5% in its latest quarter.

2. The stock may be getting ahead of itself

Costco stock has risen 26% since the start of last year , but as great as the actual company is, it hasn't been growing at that pace. After a flattish fiscal 2016 on both ends of the income statement, Costco produced net sales and earnings growth of 9% and 14%, respectively, in fiscal 2017 -- but that was, naturally, off the depressed levels from the prior year.

Stock price gains are nothing unusual for 746-unit warehouse club chain. Its shares have risen in each of the past nine years. However, the expectations are high when a stock is trading at an earnings multiple north of 30.

3. Decelerating growth can be a market turnoff

After clocking in with accelerating growth for all four quarters of its fiscal 2017 -- culminating with a 15.7% top-line spike in the fiscal fourth quarter that was its biggest gain since fiscal 2011 -- sales growth decelerated to 13.2% in fiscal 2018's first quarter, which ended Nov. 26. We're going to see another growth deceleration on Wednesday.

We already know that sales growth slipped from 14.3% in the first five weeks of the quarter to 8.4% in the five following weeks. Analysts are targeting 9.9% growth for the entire quarter. Costco growing at 10% isn't something that would typically draw boo birds, but some who hopped on the market darling's bandwagon last year during the acceleration trend may come away disappointed.

Costco is still doing a lot of things right. It continues to grow despite membership fee hikes and its 2016 switch from an American Express co-branded credit card to Visa . The red flags aren't bright red, and it may very well avoid the potholes that rattled Walmart and Target this season. However, no stock is perfect, and we'll find out how Costco has been doing lately when it reports on Wednesday afternoon.

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Rick Munarriz owns shares of Target. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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