Can Costco Wholesale (COST) Deliver an Earnings Surprise?

The fourth quarter earnings of big-box retailer Costco Wholesale Corporation (COST) are set to come out on September 26. The retail giant has seen its sales rise over the past few months as inflation continues to ease.

In this piece, I have discussed several reasons why it could be wise to watch the stock now.

For four weeks ended August 27, 2023, COST’s net sales rose 5% year-over-year to $18.42 billion. However, August’s e-commerce sales declined 2.5%. The company’s net sales for the first 52 weeks of its 53-week fiscal year ended August 27, 2023, increased 4.6% year-over-year to $232.95 billion.

For the fourth quarter ended August 7, 2023, Wall Street expects COST’s EPS to increase 14.5% year-over-year to $4.82. Its revenue for the same quarter is expected to increase 8.1% year-over-year to $77.96 billion. Additionally, its same-store sales are expected to rise 3.9%.

The Issaquah, Washington-based company had missed the consensus EPS estimate by 14.5% during the third quarter. However, its revenue matched analyst estimates of $53.65 billion. Its comparable sales rose 0.3% year-over-year, down from the increases of 5.2% and 6.6% during the second and first quarters, respectively.

The company is expected to meet the revenue and earnings estimates in the fourth quarter as consumer spending on bulk items is expected to have risen thanks to easing inflation and stable non-discretionary expenditure.

The stock has gained 22.4% in price year-to-date and 14.7% over the past year to close the last trading session at $558.59.

Here’s what could influence COST’s performance in the upcoming months:

Mixed Fundamentals

COST’s total revenue for the third quarter ended May 7, 2023, increased 2% year-over-year to $53.65 billion. Its membership fees rose 6.1% over the prior-year quarter to $1.04 billion.

The company’s net income attributable to COST declined 3.8% year-over-year to $1.30 billion. Also, its EPS came in at $2.93, representing a decline of 3.6% year-over-year.

Favorable Analyst Estimates

Analysts expect COST’s EPS for fiscal 2023 and 2024 to increase 9.8% and 7.2% year-over-year to $14.57 and $15.62, respectively. Its fiscal 2023 and 2024 revenues are expected to increase 6.3% and 5.2% year-over-year to $241.17 billion and $253.64 billion, respectively.

Mixed Valuation

In terms of forward Price/Sales, COST’s 1.03x is 7.7% lower than the 1.11x industry average. Its 9.94x forward Price/Book is 250.1% higher than the 2.84x industry average.

On the other hand, its forward non-GAAP P/E 38.33x is 114.8% higher than the 17.84x industry average. Its forward non-GAAP PEG 3.82x is 70.5% higher than the 2.24x industry average.

Mixed Profitability

In terms of the trailing-12-month Return on Common Equity, COST’s 27.56% is 144.4% higher than the 11.28% industry average. Likewise, its 3.61x trailing-12-month asset turnover ratio is 296.5% higher than the industry average of 0.91x. Furthermore, its 8.99% trailing-12-month Return on Total Assets is 109.2% higher than the industry average of 4.30%.

On the other hand, COST’s 1.71% trailing-12-month Capex/Sales is 45.8% lower than the 3.16% industry average. Likewise, its 12.28% trailing-12-month gross profit margin is 62.7% lower than the 32.90% industry average.

POWR Ratings Reflect Uncertainty

COST has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. COST has a C grade for Value, consistent with its mixed valuation. Its mixed profitability justifies its C grade for Quality.

COST is ranked #29 out of 39 stocks in the Grocery/Big Box Retailers industry. Click here to access COST’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

Easing inflation, a rise in retail spending, an increase in membership fees, and an increase in paid membership are expected to help COST meet the fourth-quarter earnings estimates. However, an earnings surprise is doubtful due to the macroeconomic headwinds.

Given its mixed fundamentals, valuation, and profitability, it could be wise to wait for a better entry point in the stock.

How Does Costco Wholesale Corporation (COST) Stack Up Against Its Peers?

COST has an overall POWR Rating of C, equating to a Neutral rating. You may check out the stocks within the Grocery/Big Box Retailers industry possessing an A (Strong Buy) rating: Natural Grocers by Vitamin Cottage, Inc. (NGVC), Village Super Market, Inc. (VLGEA), and Walmart Inc. (WMT). To access more Strong Buy-rated Grocery/Big Box Retailers set to outperform, click here.

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COST shares were trading at $556.35 per share on Monday morning, down $2.24 (-0.40%). Year-to-date, COST has gained 22.57%, versus a 13.80% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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