COST Stock: If Costco Wholesale Corporation Does This, Shares Could Soar

COST StockConsumers love to shop at Costco Wholesale Corporation (NASDAQ:COST). But its last earnings report didn’t really impress investors. In fact, COST stock went on a downhill trip since it last reported. The question now is this: will Wednesday’s earnings report cheer up Costco stock investors again?

To be honest, other than the last miss, Costco has a solid track record when it comes to an earnings beat. In the past four quarters, the company’s reported earnings-per-share (EPS) beat analysts’ expectations three times. (Source: “Analyst Estimates,” Yahoo! Finance, last accessed February 29, 2016.)

Costco is expected to release its 2Q16 earnings (ended February 14), on March 2, 2016. Here’s what analysts are expecting from the warehouse giant.

Stats on Costco Wholesale Corporation

Analyst EPS Estimate $1.29
Change from Year-Ago EPS 3.2%
Revenue Estimate $28.51 billion
Change from Year-Ago Revenue 3.8%
Earnings Beats in Past Four Quarters 3

Source: Yahoo! Finance

In order for COST stock to climb upward again, the company has to beat at least one critical number—the EPS estimate of $1.29. The last miss has sent the stock down quite a bit. So it’s crucial that the company shows its ability to surpass earnings estimates again. If it manages to do that, Costco stock could start climbing back upward.

As is the case for most retail companies, investors would also pay close attention to comparable store sales, or comps. Note that in a period where currency headwinds are going strong at U.S. companies, you should also take a look at what the numbers would be without foreign exchange fluctuations.

For instance, in its previous earnings report, Costco’s comparable sales contracted by one percent year-over-year. But the decline was mostly due to negative impacts from foreign exchange and gasoline price deflation. Excluding those impacts, Costco’s comps were actually up six percent. (Source: “Costco Wholesale Corporation Reports First Quarter Fiscal Year 2016 Operating Results,” Costco Wholesale Corporation Investor Relations, December 8, 2015.)

Note that Costco separates itself from other retail companies by being a membership club, so it’s also important to look at the company’s membership growth.

Costco’s renewal rates have been pretty strong. In the most recent quarter, the company’s membership renewal rate was 91% in the U.S. and Canada and 88% worldwide. New membership signups increased seven percent year-over-year. (Source: “Costco Wholesale Q1 2016 Results – Earnings Call Transcript,” Seeking Alpha, December 9, 2016.)

Again, due to currency headwinds, the company might not be able to generate significant growth in revenue from membership fees. Last time it reported, membership fees increased 1.89% to $593 million. Without foreign exchange impact, it would have been up six percent.

The Bottom Line on COST Stock

In case you haven’t noticed, markets haven’t been that nice to retail stocks. In the past 12 months, Wal-Mart Stores, Inc. (NYSE:WMT) plunged more than 20%, while Target Corporation (NYSE:TGT) stock just managed to break even.

Traditional variety stores are facing stiff competition from e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN). Retailers need to up their game just to survive the secular shift. Luckily, Costco managed to find growth with its no-frills approach and warehouse discounter nature. If Wednesday’s earnings report turns out to be positive, it could spark an upward trend in COST stock.