Costco Wholesale Corporation (NASDAQ:COST), the largest warehouse retailer in the U.S., will report fiscal third-quarter earnings Wednesday before the opening bell.
Despite operating in a highly competitive and mature retail industry, Costco still is finding ways to not only grow its membership total, but get its members to spend more.
That lethal combination has made COST stock a winner over the past few years, as the chart below will attest.
Costco stock, which closed Friday at $143.68, has demolished both traditional brick-and-mortar retailers like Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT) over the past three and five years. I say “traditional” because you would have to put COST stock up against an e-commerce giant like Amazon.com, Inc. (NASDAQ:AMZN), whose shares are up 98% and 250% over the past three and five years, respectively, to fully appreciate the returns COST stock has delivered to its shareholders.
I will grant that at 28 times earnings, COST stock isn’t cheap — not compared to, say, WMT stock, which trades at P/E of 15, or almost half of Costco’s multiple. And when placed against the broader S&P 500 index, which trades at a P/E of 21, the premium in Costco stock price stands out even more.
But Costco has executed in a manner that commands that kind of respect (and lofty number).
Of course, with the COST stock price now about 8% off all-time highs registered in February, including a steady 3% decline over the in the red over the past couple of months, investors seem to be undecided ahead of Wednesday’s results.
Sure, it’s not an easy decision given how putrid April’s retail sales data was. But from my vantage point, it would be grossly foolish to part with a winner like Costco stock solely based on one month’s worth of sales data.
Costco, which now represents 42 million households carrying almost 80 million membership cards, has been through this before. The company makes its money more on membership fees as opposed to retail volume. This explains why it can operate profitably with less than 500 U.S. warehouse stores, compared to 4,540 stores for Walmart. And Costco members, who are renewing their memberships at rates over 90%, are happy to give Costco more of their money.
So, instead of focusing on how expensive COST stock may appear or fret over a hiccup in April’s retail spending, it’s more important for investors to watch Wednesday’s Costco earnings report for signs of what it’s doing next to grow its overall business.
As far as the actual numbers Wall Street’s expecting:
For the most recent quarter, analysts expect Costco to deliver earnings of $1.16 per share, up 8.4% year-over-year, while revenue is expected to climb 3.3% to $26.64 billion. For the full year ending in August, the company’s expected to grow earnings 13% to $5.24 per share on revenues projected to climb 5% to $118.53 billion.
Bottom Line
It’s not easy finding winners like COST. Remarkably, investors insist on making it harder on themselves by overthinking and stretching to see that a run is over before the company has truly peaked.
In this case, forget the P/E and focus on Costco’s business. Accordingly, I’m modeling for COST stock to reach $160 per share in the next 12 to 18 months, based on fiscal 2016 earnings estimates of $5.71 per share.
Not to mention, as the retail pie grows, Costco’s business model is well-positioned to capture market share and grow profits, helped by its low store count.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
