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Buy Costco (COST) Stock Before Q3 Earnings After Walmart & Target Impress?

Benjamin Rains

Shares of Target TGT soared nearly 8% on the back of blowout Q1 fiscal 2019 financial results that show its e-commerce and modern retail growth initiatives have helped it fight back against Amazon’s AMZN encroachment. Walmart also reported strong quarterly results on the back of continued digital and delivery expansion.

With that said, let’s see if investors should buy fellow big-box retail powerhouse Costco COST stock ahead of its quarterly earnings release, which is due out Thursday, May 30?

Quick Retail Overview

Target posted 4.8% comparable sales growth in Q1, with traffic up 4.3%. On top of that, the Minneapolis-based retailer’s digital sales soared 42%, which came on top of the year-ago period’s 28% expansion. Target management said that offerings such as Order Pick Up, Drive Up, and Shipt helped drive e-commerce growth.

Investors should also note that Walmart last week saw its U.S. comp sales pop 3.4%. This marked its strongest first-quarter growth in this vital retail category in nine years and the fourth straight period of 3% or better comps expansion. Walmart, like its peers such as Target and Kroger KR, has also rolled out a series of digital and delivery offerings.

On the other hand, department stores like Macy’s M, J.C. Penney JCP, Kohl's KSS, and Nordstrom JWN have had a much more difficult time adapting to the Amazon-obsessed retail age. As of Wednesday, Q1 results from 71.8% of the Retail sector stocks in the S&P 500 were out, with total earnings and revenues for the sector up +13.7% and +8.3%, respectively (also read: Retail Sector Fails to Impress).

 

 

Costco

We can see that shares of COST have outperformed Walmart, Target, and Amazon over the last 12 months. Costco stock has climbed over 22% in 2019 to top its industry’s 17% average. Plus, COST stock hit a brand new 52-week intraday high of $251.01 per share on Wednesday.

Moving on, Costco offers free two-day delivery for non-perishable food and household supplies to customers nationwide on orders of $75 or more, with a fee charged for smaller orders. Costco has also expanded its same-day delivery service to “most” metropolitan areas through its Instacart partnership. And the discount retailer has stood out from its rivals on the customer experience side. The firm overtook Amazon’s spot as the No. 1 internet retailer in terms of customer satisfaction in 2018, according to the American Customer Satisfaction Index.

Outlook & Earnings Trends

Costco reports its monthly sales figures throughout the year, with April 2019’s sales up 7.3% to $11.60 billion. Overall, our current Zacks Consensus Estimate calls for the company’s Q3 fiscal 2019 revenue to jump 7.8% to reach $34.88 billion. Investors should note that this estimate includes Costco’s membership fees. This would beat last quarter’s roughly 7.3% top-line expansion and come on top of the prior-year quarter’s 12% revenue growth.

At the bottom end of the income statement, Costco’s adjusted quarterly earnings are expected to climb 7.65% to hit $1.83 per share. Last quarter, COST posted an impressive 20.36% surprise on the bottom line. Meanwhile, Costco’s earnings estimate revision activity has trended more heavily upward, with its Q3 consensus up $0.01 over the last 60 days.

 

 

Bottom Line

Costco is a Zacks Rank #3 (Hold) at the moment and sports an “A” grade for Growth and a “B” for Momentum in our Style Scores system to help it earn an overall “A” VGM score. The company’s price/sales ratio of 0.75 rests a bit above its industry’s average of 0.64. Yet, the company looks strong compared to the likes of TJX Companies’ TJX 1.64 and Dollar General’s DG 1.23.

Plus, investors will remember that COST stock has outpaced its industry over the last year. Jumping back over the past five years, shares of Costco have climbed 117% compared to its industry’s 97% average—which has been boosted by Amazon’s massive climb. Costco is also a dividend payer, with an annualized payout of $2.60 per share right now and a 1.04% yield.

In the end, COST looks strong and its peers have performed well recently. But buying stocks heading into earnings is no easy task, as no one ever knows how Wall Street will react to even the ‘strongest’ of reports, especially in the near term.

Costco is scheduled to release its Q3 fiscal 2019 financial results after the closing bell on Thursday, May 30.

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