Can Costco Wholesale Corporation Stock Keep Rolling Higher?

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The retail space is a scary place right now, especially for companies that are in direct competition with the likes of, Inc. (NASDAQ: AMZN ). However, a handful of firms have been able to thrive despite the industry's shifting landscape. Costco Wholesale Corporation (NASDAQ: COST ) is one of them. COST stock has gained nearly 18% so far in 2017, even though worries about whether the company's business could continue to prosper took the share price markedly lower earlier this year.

Costco is due to report first-quarter earnings on Dec. 14 after the bell: here's a look at what to expect from theearnings calland COST stock.

COST Stock: Customer Retention Is Key

Perhaps the single most important metric that investors will have on their minds on Thursday is Costco's renewal rates. In early October, the firm's fourth-quarter results revealed that renewal rates in the U.S. and Canada dropped to 90% from 91% two years earlier.

While a 90% renewal rate is certainly nothing to sneeze at, investors panicked a little bit because part of what makes COST stock so appealing is its membership fees and impressive customer retention. If that figure starts to decline, it would represent a chink in Costco stock's armor and it could suggest that the firm is more susceptible to growing online competition than investors initially thought.

However, Costco CFO Richard Galanti said that the decrease was likely the result of the firm's transition to a new credit card partner. The changeover, he said, interfered with auto renewals.

This quarter, investors will be eager to hear about renewals for confirmation that the firm's customers are still loyal members who will continue to pay their membership dues.


At the end of November, COST revealed that its net sales during the fiscal first quarter rose 13.2% from the year-ago quarter, so although that impressive rise will likely be featured in Thursday's release, it's old news. Instead, investors should have their eyes on Costco's gross margins.

COST's fourth-quarter results showed that gross margins shrank, which caused the stock to decline by 7.5%, so this Thursday's results will likely have a big impact.

Unlike traditional retailers, Costco doesn't make the majority of its money selling goods. Instead, it earns from its subscription dues. The firm has historically kept margins low in order to entice people to buy a membership.

That means that the excitement surrounding improving comps may not mean much profit-wise if the firm's margins continue to be ultra-low. While it's promising to see sales increase because it means people are shopping at Costco, it's important to note that those sales aren't actually generating much profit. So, before you get caught up in the excitement surrounding Costco's impressive sales figures, have a look at the firm's margin expansion to see whether those improving sales are actually making COST some money.

Costco Grocery

Costco has been upping its online game in recent quarters in order to fend off advances from Amazon and other competitors. This October COST launched Costco Grocery, a delivery service for both perishable and non-perishable goods. The move will hopefully help Costco remain relevant for customers who want to enjoy the store's price advantages but don't want to take the time to travel to a physical store location.

COST has been able to maintain customer traffic, even as e-commerce expands because of its unbeatable prices and because of the "treasure hunt" effect - the feeling customers get when they find a bargain in a store with constantly changing inventory. However, it would be negligent to assume that the firm can continue to grow without meaningful steps forward in e-commerce. Prices often take a backseat to convenience, a reality that Amazon has been able to capitalize on and COST stock will need to keep up with.

Costco's e-commerce arm saw respectable growth of 21% in the fourth quarter, but the firm will need to up its game considerably if it wants to compete with the likes of companies like Wal-Mart Stores Inc (NYSE: WMT ), which reported that e-commerce sales rose by 50% in the most recent quarter.

COST Stock: Buy or Sell?

There's a lot of momentum around COST stock right now, but the excitement has made the firm considerably more expensive. The release of Costco's impressive first-quarter comps boosted the stock higher, but as I mentioned, that might not mean much in terms of dollars that shareholders will see.

COST stock is a solid long-term buy, but the firm's high share price might be reason to wait for a pullback. However, Costco is likely to put out impressive first-quarter results on Thursday, so the stock is likely to make its way higher in the near-term.

As of this writing, Laura Hoy was long AMZN.

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The post Can Costco Wholesale Corporation Stock Keep Rolling Higher? appeared first on InvestorPlace .

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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