What To Expect From Costco’s Q4

by Trefis Team
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Costco (NASDAQ:COST) is scheduled to announce its fiscal fourth quarter results on Thursday, October 4. The company announced solid third quarter results, as both its revenue and earnings per share came in ahead of market expectations. However, Costco’s gross margins narrowed despite higher sales, largely due to the company’s investments to boost online sales through services like same-day delivery and automated fulfillment centers. Overall, the retailer’s revenue increased 12% year-over-year (y-o-y) to around $32.3 billion in the third quarter, driven by growth in membership fees and a 10% increase in comparable sales. The retailer reported net earnings of $1.70 per share, up 7% y-o-y.

Our $233 price estimate for Costco’s stock is slightly below the current market price. We have created an interactive dashboard on what to expect from Costo’s fiscal Q4, which outlines our forecasts for the company. You can change expected revenue, operating margin and income margin figures for Costco to gauge how it will impact expected EPS for the current quarter. We expect Costco’s revenue and earnings to grow in Q4, primarily due to the company’s value offerings and high membership renewal rates, coupled with cost and productivity savings.

In a recent press release, Costco reported that its comparable store sales during the fourth quarter increased by 10%, including the impact of gasoline prices and currency effects, largely driven by a strong 11% comparable sales growth in the U.S. and 6% in Canada. Excluding gasoline and currency fluctuations, combined comparable sales increased by 7%, driven by 8% growth in the U.S., a 5% rise in Canada and 7% growth in other international markets. This growth momentum confirms that the company is still able to grow traffic at its brick and mortar warehouses despite stiff competition in the grocery sector, and growing overlap with Amazon (NASDAQ: AMZN) since it purchased Whole Foods.

Costco has been able to consistently grow its U.S. same-store sales over the last three months, even after it raised membership fees in June 2017. This implies that the fee increases have not affected many customers. In fact, the retailer has managed to grow its membership base in fiscal 2017 (ended Sep 3, 2017) to 90 million, albeit at a slower y-o-y rate. The company relies heavily on its membership fees, despite the fact that these fees account for only 2% of its total revenues. Membership fees contribute around 17% of the company’s value, per our estimates, given the low costs associated with this revenue stream. Overall, Costco’s organic performance has been keeping pace with the U.S. retail industry, in large part due to its business model – which relies on low margins and high volumes.

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