Costco Stock Has a Lot to Prove This Week

It’s a big week for Costco Wholesale (COST 2.20%) investors. The leading warehouse club operator will announce its financial results for its fiscal first quarter on Thursday. Costco reports tend to be fairly consistent, but with a new CEO taking over next month there’s going to be more attention than usual to make sure that there’s no fumbling of the handoff here.

With Costco shares hitting an all-time high on Monday it can’t afford to stumble. Let’s take a closer look at the numbers, the leadership transition, and the impact of the inevitable increase of the warehouse club’s membership fees. Yes, Costco has a lot to prove this week.

Everything counts in large amounts

There isn’t a whole lot of mystery or intrigue behind how the top line will play out in this week’s report. Costco announces its monthly numbers within days of a period closing, so investors have known for almost two weeks how its revenue will look. The warehouse club giant delivered $56.71 billion in net sales for the 12 weeks ending on Nov. 26, a 6.1% increase from the prior year.

Comps rose 3.8% across all of its stores for the quarter, as international locations helped boost a more modest 2% lift in comparable-store sales at its U.S. warehouses. Total store comps would have risen 3.9% if you back out the volatile gas prices and foreign exchange translations. Costco’s net sales are higher than its comps as a result of the concept’s slow yet steady expansion.

Investors have monthly granularity of the business as a result of Costco’s month-end reporting. Business accelerated sequentially in November after slumping in October.

• September comps: 4.5%
• October comps: 3%
• November comps: 3.5%

Image source: Getty Images.

What the market will be watching

The bottom line is where the larger question marks come into play. Costco isn’t the kind of company that puts out soft guidance that it can blow past with ease. Over the past four quarters it has actually fallen short of Wall Street profit targets in half of the reports. The misses obviously haven’t stopped Costco from kicking off this new trading week at new highs.

Analysts are modeling an 11% increase in net income per share of $3.41, but that range is as high as $3.67 and as low as $3.18 heading into this week’s financial reveal. It won’t be the only thing that investors will be watching for on Thursday. The market has seen some deep discounters stumble this earnings season as customers shift their spending to low-margin essentials, but Costco’s bare-boned approach to overhead and pricing across all categories makes this less of a potential stumbling block.

Costco hasn’t increased is annual membership prices since 2017, and this is critical as the low mark-ups on its products and services means the lion’s share of its profitability rests in its member dues. Costco’s CFO suggested in the retailer’s last earnings call that an increase is coming soon. With inflationary pressures easing and the economy showing signs of resiliency it wouldn’t be a surprise if a hike is in the cards come 2024. It’s a fair bet that the topic will come up during this week’s conference call.

There will also be some eyes on the leadership transition. This will be CEO Craig Jelinek’s final earnings call, but there shouldn’t be a lot of concern about Costco changing with someone new at the helm. Ron Vachris will become the chain’s new CEO next month, but he has spent four decades at the company. He started as a forklift driver — how’s that for a feelgood story? — and has gone on to serve in every major role related to Costco’s business operations and merchandising activities.

Costco stock isn’t cheap, but that is the default setting for this all-weather market darling. Costco is trading at 39 times this new fiscal year’s projected earnings, and that multiple only drops to 36 if you eye early forecasts for fiscal 2025.

The shares have been as resilient as the business itself. Costco stock is up 29% in the past year, 67% through the past three years, and 236% over the last five years. It doesn’t need a blowout performance to justify the shares at a fresh high-water mark this week. Costco just needs to keep being Costco.