Costco Wholesale Corp. (ticker: COST) will step up to the earnings plate Thursday evening for its fiscal third-quarter financial report. And while Costco stock has long been a source of uncharacteristically steady growth from the retail sector, the company’s quarterly earnings ritual has in recent years become a test of investor nerves.
What Costco will show up this week?
If the sector’s announcements over the past month are any indication, you can put on a blindfold and toss a quarter at a dartboard.
Department-store retailers such as Macy’s ( M), Kohl’s Corp. ( KSS) and JC Penney Co. ( JCP) made headlines for dreadful post-report losses, as did discounter Stein Mart ( SMRT), which plunged after a dismal miss. However, Target Corp. ( TGT) and Wal-Mart Stores ( WMT) provided much-better-than-expected results last week, providing hope that perhaps the big-box format is where retail-sector investors can find some sanctuary.
[See: 7 of the Best Stocks to Buy for 2017.]
So what might give us a hint as to what third-quarter earnings hold? Perhaps the better question is: How much will Thursday really matter three, six or 12 months from now?
The headline numbers. Investors could take a little encouragement from how highly Wall Street regards Costco’s prospects for its fiscal third quarter.
While many other retailers are suffering lousy year-over-year comparisons, analysts expect Costco to produce a 6.5 percent improvement on the top line to $28.5 billion, which should fuel a 5.6 percent gain on the bottom line to $1.31 per share.
It’s hard to see Costco disappointing this week — at least on the top line — given the pair of monthly sales reports it has released so far. March and April sales jumped 9 percent and 5 percent, respectively, on same-store sales improvements of 7 percent and 3 percent.
Short-term pain, long-term gain. Some investors justifiably are worried about the effect of Amazon.com ( AMZN) on Costco’s performance this quarter, given how much the e-commerce operator appears to have cut into the sales of the rest of the sector.
But Barclays’ Karen Short, who upgraded COST to “overweight” in April, pooh-poohed that, pointing to a customer purchase intent survey that indicates “more than 80 percent of customers go to COST specifically for food,” and that 57 percent of Costco’s sales are related to groceries.
In fact, there’s little evidence that Amazon is an existential threat to Costco, which has posted top-line growth without pause since 2010 and whose stock has posted positive returns every year since 2009, making it a rare consistent winner in the retail space.
But COST stock is hardly delivering those gains in a straight line … and a lot of the nauseating moves come after earnings. For instance, just a couple of months ago, Costco shares shed more than 6 percent in two days after profits and sales missed analysts’ mark. The stock suffered similarly lousy reactions after first-quarter earnings in August and December 2015. The flip side? Even poor earnings results have kicked off rallies in COST stock, including after big misses in May and December of last year.
However, while Costco might occasionally disappoint the analyst community, the long-term continues to point north. That’s because the warehouse giant keeps delivering modest but consistent growth that pleads the case for patience amid its short-term fits and starts.
That’s reflected in firm (albeit not overexuberant) recommendations like those by Susquehanna’s Bill Dreher, who reiterated his “positive” rating on COST because of “the strong monthly comp sales performance and management’s commitment to rewarding shareholders.” He continues, “Gross margins are expected to normalize in [the third quarter] and membership fee income will benefit for two years from the recently announced 10 percent increase effective June 1. Combined with better than expected earnings contribution from the Citi credit card partnership, we believe COST is well positioned as a core retail, defensive growth holding.”
[See: 10 Best ETFs for Large-Cap Stock Growth.]
The partnership he’s referring to is the company’s agreement with Citigroup ( C) and Visa ( V). Costco announced in 2015 that it would end its longtime relationship with American Express Co. ( AXP), but the actual switch in April 2016 was met with some technological difficulties that had Wall Street doubting the move.
More signs than not point to a third-quarter beat come Thursday evening. But investors should simply be looking for a continuation of Costco’s strong performance. As long as they get that, returns will eventually follow.
More Earnings in Focus
Abercrombie & Fitch Co. (ANF). Abercrombie is surprisingly among the few brick-and-mortar retail stocks that are in the black so far this year, but that’s largely because of reports that the battered teen retailer is shopping itself around. American Eagle Outfitters ( AEO) and Express ( EXPR) are supposedly interested in taking over. But Abercrombie has maintained its 20-cent quarterly dividend; Thursday’s first-quarter earnings report, due before the bell, will give us insight into how ill-equipped ANF is to keep paying it. (Abercrombie’s dividend has outstripped its profits for years now.) This quarter, analysts expect ANF’s losses to widen 18.6 percent year-over-year to 70 cents per share, on a 5 percent revenue decline to $650.99 million.
Best Buy Co. (BBY). Best Buy is beating the market soundly in 2017 with 20 percent gains, and doing so on real signs of strength, including expanded fourth-quarter margins and higher online sales. Analysts have gradually piled into the long camp, with BofA/Merrill Lynch upgrading in April on product cycle hopes and Best Buy’s increased focus on services. Piper Jaffray upgraded for the same reasons, as well as hopes that store closures by HHGregg and possibly Sears Holdings Corp. ( SHLD) would benefit BBY. The first quarter is expected to be soft, though, with analysts projecting a 2 percent top-line decline to $8.27 billion, trickling down to a 9 percent bottom-line drop to 40 cents per share.
This Week’s Earnings Calendar
Monday. Agilent Technologies ( A), Booz Allen Hamilton Holding Corp. ( BAH)
Tuesday. Diana Shipping ( DSX), DSW ( DSW), Intuit ( INTU), Take-Two Interactive Software ( TTWO), Tata Motors Ltd. ( TTM), Toll Brothers ( TOL)
Wednesday. Advance Auto Parts ( AAP), Amerco ( UHAL), Guess ( GES), HP ( HPQ), JA Solar Holdings Co. Ltd. ( JASO), Lowe’s Companies. ( LOW), NetApp ( NTAP), PVH Corp. ( PVH), Tiffany & Co. ( TIF), Williams-Sonoma ( WSM)
Thursday. Burlington Stores ( BURL), Deckers Outdoor ( DECK), Dollar Tree ( DLTR), GameStop Corp. ( GME), Hormel Foods Corp. ( HRL), Signet Jewelers Ltd. ( SIG), Splunk ( SPLK), Toronto-Dominion Bank ( TD), Ulta Beauty ( ULTA)
[See: 10 Long-Term Investing Strategies That Work.]
Friday. Big Lots ( BIG)
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Earnings Preview: Costco Wholesale Corp. (COST) Needs a Win originally appeared on usnews.com
