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Will Costco (COST) Continue Its Run with Strong Q4 Earnings?

Christopher Vargas

Costco COST is set to report their fourth quarter results after the closing bell on Thursday. The wholesale giant’s shares have risen 40% this year thus far, easily outpacing the broader wholesale/retail market’s 16.8% gain. The firm is looking to report a strong quarter to close out fiscal 2019 on a high note.

Costco is coming off a third quarter where their stellar year over year gains continued. Will the retail giant continue its growth trend in its upcoming report? Let’s take a look at how things might go for Costco this earnings season.

Company Overview

Based in Issaquah, Washington, Costco sells high volumes of food and general merchandise like household products and appliances at discounted prices through membership warehouses. The company also operates e-commerce websites in the US, Canada, Mexico, U.K., South Korea, and Taiwan. Costco generates revenue from two main sources: Store sales and membership fees.

In Q3, Costco reported a total revenue climb of 7.35% to $34.7 billion and a bottom-line leap of 11% to $1.89 per share. The firm’s reported top-line figure fell short of our estimate by 0.36% and its bottom-line surpassed our estimate by 3.28%. Store sales attributed $33.96 billion in revenue for a 7.4% Y/Y hike, and membership fees generated $776 million in sales for a 5.29% leap.

The company also boasted some solid comparable sales growth in the third quarter. Costco’s same-store sales rose 5.5% year over year, reflecting an increase of 7%, 1.3% and 1.7% in the United States, Canada and Other International locations, respectively. Comparable sales for e-commerce were up 22% in the quarter as well.

Q4 and Full Fiscal Year Outlook

During Costco's Q3 earnings call, Costco’s CFO, Richard Galanti indicated that the company will continue its practice of trying to be the last retailer to raise prices. Nevertheless, he said Costco will eventually raise prices to the extent that it can't mitigate cost increases. Let’s see how our estimates have them doing in the closing quarter and where it would put them for their full fiscal year figures.

Our Q4 consensus estimates project the company’s top line to rally 6.41% to $47.26 billion and for earnings to come in at $2.54 per share. Comparable warehouse sales in the US and Canada are expected to grow a respective 6.16% and 3.2% year-over-year. Looking at their fiscal 2019, consensus estimates anticipate earnings to gain 17.86% to $8.05 per share while net sales are projected to grow 7.5% to $152.4 billion.

Takeaway

Many investors are wondering how the macroeconomic headwinds will impact Costco and whether their report will be an indicator of what’s to come from the retail sector this earnings season. Last quarter, retail giants like Target TGT and Walmart WMT led the pack with their strong financials and ability to momentarily mitigate the tariff headwinds. We will see how the tariffs will impact companies this time around as some of the latest rounds of tariffs directly targeted everyday household items.

Some think that Costco can use its unrivaled purchasing power to maintain low prices for their members and maybe even gain market share while other smaller companies succumb to the tariffs, but it remains to be seen. Costco is currently listed as a Zacks Rank #3 (Hold).

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