Costco — How to Play Wednesday’s Earnings Report

by Jamie Dlugosch | October 4, 2011 10:34 am

Wholesale discount retailer Costco (NASDAQ:COST[1]) reports earnings for the quarter ending Aug. 31 on Wednesday. One of the few businesses and stocks doing well in 2011 should continue that performance with its most recent operating report.

In the period to be reported, retail sales have held up relatively well. In August, Costco reported that same-store sales had increased by 7%, which followed an impressive 10% surge in July. In June, same-store sales were an impressive 14% higher.

All of those numbers should have investors resting easy when the company reports profits for the quarter. Thus far, Costco does not appear to be seeing any sort of slowdown in growth from the economic slowdown. If anything, COST appears to be doing well thanks to the allure of its discounts.

During the past four quarters, Costco’s quarterly profits have approximated average Wall Street estimates:


In the last quarter ending May 31, Costco missed estimates by four cents per share. That news was interpreted by the market to be a temporary blip. Shares traded sideways after that report and only took a small step back when the market dropped in mid-July. Since the small slide, Costco shares recovered. The stock is one of few to be trading higher today than where shares traded in early July.

For the quarter ending Aug. 31, the average Wall Street estimate for profits is $1.10 per share. That is a penny higher than where estimates stood 90 days ago. For the full year also ending Aug. 31, the average Wall Street estimate for profits is $3.32 per share. That number is expected to jump 16% in the following year. At current prices, shares of Costco trade for 21 times next fiscal year’s estimated earnings.

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During the past 12 months, Costco has gained a healthy 26%.

Impressive same-store sales in the quarter to be reported bode well for profits. At the same time, Wall Street estimates have only increased by a penny per share during the past 90 days. Still, fears of a recession have not manifested in a lower stock price for COST. In fact, the opposite has occurred.

Costco’s business model benefits from economic struggles. The more consumers in search of deals, the better for Costco. The only negative I can see for COST is valuation. Shares are richly priced relative to expected profit growth in the next fiscal year. That said, companies reporting strong results and rich valuation managed to do very well in the market after reporting results. Case in point: Nike (NYSE:NKE[3]).

With double-digit monthly same-store sales increases, look for Costco to beat earnings by a wide margin when it reports results Wednesday. I would expect the company to be a bit conservative with respect to future guidance, but that should not put a damper on the market’s response to the report. A rich valuation has taken away some of the upside from a positive report, but Costco still could gain 3% to 5% as investors breathe a sigh of relief that things are not as bad as many seem to think.

Other companies reporting results this week include Marriott International (NYSE:MAR[4]), Monsanto (NYSE:MON[5]), Ruby Tuesday (NYSE:RT[6]), Helen of Troy (NASDAQ:HELE[7]) and Constellation Brands (NYSE:STZ[8]).

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