Costco (COST) stock has traded flat in the past six months, while under-performing the S&P 500 index over the past year, rising 26% to the S&P’s 40%. Notably, this is even though the company has topped consensus revenue estimates in each of the last five quarters. But the shares could offer double-digit return potential for patient shareholders.
The nation's largest warehouse retailer will report second quarter fiscal 2021 earnings results after the closing bell Thursday. According to Christopher Graja, analyst at Argus, Costco’s membership business model will continue to offer significant returns in the next several quarters even as normality returns. "We believe that Costco's financial strength and ability to deliver exceptional value to consumers are key differentiators for the stock in the current market environment,” noted Graja.
The company’s “buy in bulk” business profile has made it a standout during the pandemic. The question is, can Costco overcome the tough comps created by the panic-buying it benefited from during the peak of the pandemic? The company has shown no noticeable declines in the last two quarters — a point Graja also made. “Our analysis of core operations suggests that execution of the business plan remains excellent with historically strong traffic and membership renewals.”
The company ended fiscal 2020 with 105 million members, up about 12% from 2018, reflecting about 6% annual growth. Not only is Costco still finding ways to grow its membership total, the company is also getting its club members to spend more. And with membership renewal rates consistently above/around 90%, Costco’s stock won’t remain stagnant very long. Nevertheless, the company’s profit margin guidance on Thursday must reflect that confidence.
For the quarter that ended April, analysts expect Costco to earn $2.32 per share on revenue of $43.63 billion. This compares to the year-ago quarter when earnings came to $1.89 per share on revenue of $37.13 billion. For the full year, ending August, earnings of $10.08 would rise 15% year over year, while full-year revenue of $188.88 billion would rise 13.3% year over year, topping last year's mark of $166.76 billion.
The company's outlook for the next six months will indicate whether it believes it has what it takes to keep gaining market share from its brick-and-mortar competitors. So far, despite operating in a highly competitive and mature retail industry, which includes behemoths Walmart (WMT), Target (TGT) and Amazon (AMZN), Costco continues to attract tons of foot traffic. What’s more, having recently revamped its mobile app, Costco has also begun to reap the rewards of its e-commerce and online investments.
In the fiscal first quarter, the company beat on both the top and bottom lines, posting adjusted EPS of $2.14 per share, beating by consensus estimates by 12 cents. Q1 revenue of $44.77 billion rose 14.6% year over year, topping analysts’ forecast by $1.05 billion. Just as impressive, Q1 adjusted same-store sales in the U.S. rose 12.6%, while international same-store sales rose almost 18%. Remarkably, online same-store skyrocketed 74.8% year over year.
These metrics reflect how the company is capitalizing on both offline and online opportunities. Investors will want to see these strong fundamental trends continue on Thursday. The company’s guidance will be even more important to assess the strength of the consumer.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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