The Exchange

Retail Reports: The 3 Things to Watch for in Costco’s Earnings

The Exchange

By Marek Fuchs

Costco’s (COST) third-quarter earnings, due out Thursday morning, will provide a punctuation mark to a long, strange retail earnings season.

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Reuters

After all, depending on which retail earnings report you’ve read recently, the consumer economy is either rising or rickety. Think about it: You could lay recent retail results end-to-end without reaching a firm conclusion.

Home Depot (HD) did well...while the other big home improvement chain, Lowe's (LOW), came in light and blamed the weather. Tiffany’s (TIF), which sells high-priced goods to the swanky set, excelled, while Abercrombie & Fitch (ANF), peddling overpriced T-shirts to that swanky set’s children, tanked, even as competitor Urban Outfitters managed to run in place (URBN). We can go on...and on…with this hit (and miss) parade, but there’s only one diagnosis for this quarter: multiple personality disorder.

Enter Costco.

With Target (TGT) and Wal-Mart (WMT) already coming in with weak results, Costco might very well tip the balance of public perception toward the sense that, with the exception of a few operators with the knack, the retail season was lame and the economy, by extension, is on the downslope. A good performance, hitched to Tuesday’s consumer confidence and housing numbers, can keep hope alive that the economy is reconditioned, even ready to run.

[See related: Home Depot: The World's Most Important Stock?]

In terms of Costco, consensus stands at $1.02 per share, according to Zacks, up from last year’s third-quarter bottom line of 88 cents per share. Revenue is projected to come in at $24.2 billion, a 9% increase over the year-earlier total.

The 3 variables

Costco, though, may be set for a slight lapse. Three variables – gas, membership fee hikes and recent same-store sales results – could conspire against it.

Let’s talk gas, as most are not.

Wall St. Cheat Sheet gives us a firm grasp of the obvious – “shareholders could expect a boost if the company beats estimates” – but, along with Forbes, fails to mention the gas aspect.

Costco sells gas, generally at lower prices than local stations. This frequently leads to a degree fluctuation in the earnings, which always need to be backed out, as gas prices are so variable. But Costco’s cheaper gas – at least in periods of rising oil prices – also draws more shoppers to the warehouse portion of the stores. People stop for gas and end up buying 10 tubs of chunky peanut butter.

Problem is, gas prices moderated through March and April, sliding from a national average of over $3.70 for a gallon of regular unleaded to less than $3.50. The numbers were generally down from the comparable period last year. While that may have given consumers a few more nickels to rub together, fewer people were coming to Costco for cut-rate gas, which means its likely that less of those nickels made their way to the 47-roll toilet paper aisle in Costco. Even if consumers roamed Costco with the same frequency, the payroll tax hike, obviously no friend to Wal-Mart and Target, probably ruined any gas price advantage in Costco’s case, too.

In its preview coverage, the media have also almost completely forgotten Costco’s membership fee hike. Pushed through toward the end of 2011, the 10% increase in cost to become a Costco member, which grants you the privilege to shop, boosted results in the third-quarter of 2012. There was no increase this year, which will make the comparison more challenging.

Costco has reported a pair of light same-store sales results in recent quarters – we haven’t seen a good one since February, which does not automatically doom a company’s prospects but rarely serves as a harbinger of surprisingly good tidings in an earnings report.

Costco will have the final word and all indications are that times are better than pitiful but by no means good.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.

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