Costco Looks to Keep Defying Retail’s Challenges

FAN Editor

There’s been a massive shift in the retail world, and millions of young shoppers have grown up in an environment in which traditional shopping malls have played an ever-smaller role in helping them find the things they need. Yet even amid all the e-commerce tools designed to change the shopping experience, Costco Wholesale (NASDAQ: COST) continues to rely largely on bringing people into its stores and giving them the bargains they want week in and week out.

Investors expect to hear from Costco on Thursday, when it will likely release its fiscal third-quarter earnings report. In its results, Costco is likely to show its shareholders that it’s been able to persist in its efforts to produce growth with its traditional business model. With its stock near all-time highs, Costco will also want to demonstrate to investors that it believes it’ll be able to keep the pace even as internet-based shopping becomes more prevalent across the retail industry.

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Key stats on Costco

How will Costco likely fare?

Over the past few months, investors in Costco have gotten more optimistic about what they’re likely to see on the warehouse retailer’s bottom line. Although they don’t necessarily see huge numbers coming out of the fiscal third quarter, they’ve boosted their projections for the full 2019 fiscal year by roughly 3%, and they’ve also increased their earnings predictions for fiscal 2020. That optimism has also showed up in the stock price, which is up 13% since late February.

A big part of the move higher for Costco shares came right after it released its fiscal second-quarter results back in early March. Revenue was up more than 7% compared to year-earlier levels, with adjusted comparable sales gains of 6.7% worldwide. Strong performance in its home U.S. market helped to offset weakness in Canada and elsewhere across the globe, and Costco also managed to boost its net income by 27%, producing earnings of $2.01 per share that topped what investors had expected to see by a whopping $0.32 per share. Despite seeing some slightly difficult conditions due to adverse weather, Costco said that it continued to tap into its growing e-commerce business, which saw comps of greater than 20% during the period.

Investors are also fortunate to get some early readings on how each quarter is doing from its monthly sales releases. In March, revenue climbed 7.4% from 2018’s monthly levels, with adjusted comparable sales gains of 5.9% stemming largely from international sources. April’s numbers were largely consistent, with sales climbing 7.3%, although total company comparable sales gains of 5.2% were a bit weaker on an adjusted basis compared to recent months.

Costco has increasingly demonstrated its shareholder-friendliness to investors. In late April, the retailer boosted its dividend by 14%, bringing its dividend yield back above the 1% mark despite its soaring share price. At the same time, Costco also announced that it would put in place another $4 billion stock repurchase program, replacing the one that lapsed in April. That made shareholders more optimistic about Costco’s prospects, even though the company hasn’t tended to use all the money that it’s authorized to do buybacks in the past.

Yet one key aspect of the coming report that Costco shareholders will have to deal with for the first time in a while is that tax reform efforts in late 2017 will no longer make a difference in year-over-year comparisons. Big bottom-line growth like the numbers that investors saw last quarter are unlikely to repeat themselves, simply because the savings in corporate income taxes played a substantial role in helping to boost earnings. Some of those following the stock might be disappointed with the single-digit percentage gains that the consensus forecast predicts for Costco this quarter — and they’re likely to be even more uncomfortable if the warehouse retailer can’t live up to those expectations.

In its quarterly report, Costco investors can expect to learn more about how the retail giant is working to adapt to the changing environment in its broader industry. Although most traders will focus on short-term numbers that can show seasonal fluctuations and move the share price, long-term investors should stay focused on watching Costco’s broader strategy for adapting to new consumer preferences while continuing to deliver the customer experience that millions of its members count on from the company.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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