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Food and gas prices are still, relatively speaking, up there. When membership warehouse chain Costco Wholesale Corp. reports fiscal fourth-quarter results after the market close on Tuesday, we’ll get a better idea of how shoppers are responding as the search for a break from higher prices continues into the holiday-shopping season.
The quarterly figures will follow results this summer from Walmart Inc., where grocery sales were a plus, and Target Corp., where sales in things that aren’t groceries or other basics continued to weigh on the business.
Higher prices overall have prompted many shoppers to seek out basics at a lower price at discount stores. But even as price increases slow from last year’s levels and some analysts grow less pessimistic about the economy, higher gas prices have emerged as a big driver for inflation recently, as Saudi Arabia and Russia produce less oil. The resumption of student-loan payments, meanwhile, has had some analysts worried about the impact on consumer spending.
But heading into the results, some analysts felt that Costco
COST,
— which sells food, gasoline and clothing and also offers things like pharmacy and optical services — remained an attractive option against that backdrop.
“Given the continued economic strain on consumers, we believe that Costco’s executive membership penetration likely remained strong as people looked to maximize their spending power,” UBS analyst Michael Lasser said in a research note last week.
“Moving forward,” he continued, “we believe [Costco] can continue to appeal to a cash strapped consumer, and has a potential catalyst in place with a membership fee hike likely next year.”
What to expect
Earnings: Analysts polled by FactSet expect Costco to report adjusted earnings per share of $4.79. Estimize, which crowdsources estimates from hedge funds, academics and others, also forecast earnings per share of $4.79.
Revenue: FactSet forecast revenue of $77.72 billion. Estimize forecast sales of $77.74 billion.
Stock movement: Shares of Costco were down 0.4% on Monday. So far this year, the stock has marched 22.7% higher. By comparison, the S&P 500
SPX
has risen 13.2% over that period.
What analysts are saying
Data from Placer.ai, an analytics firm focused on retail foot traffic, found that Costco saw an increase in customer visits over the summer, while those visits fell at other wholesale clubs and superstores.
“Costco emerged as a back-to-school powerhouse this year, and comparing 2023 and 2022 Costco visitor behavior further showcases the chain’s growing back-to-school clout,” Shira Petrack, writing for Placer, said in a blog post on the firm’s website.
Edward Jones analyst Brian Yarbrough noted in a research note last month that Costco derives more than 70% of its operating profits from membership fees, allowing it to turn a profit while keeping prices lower than many other retailers. Membership renewal rates, he said, stood at 89%.
“Warehouse clubs have demonstrated resilience to economic swings due to the high proportion of food in these stores’ sales mix and low prices,” he said. “The company is vigilant in keeping its product profits relatively narrow in order to demonstrate its value proposition to consumers and retain higher customer loyalty.”
But those fees could get more expensive soon, UBS’s Lasser said.
“Is now the time to raise the membership fees? It could be, but we think next year is most likely for a membership fee increase,” he said.
“Historically, the company has adopted a pattern of revising its rates every 5-6 years,” he continued, noting that the last adjustment was announced on March 2, 2017, and went into effect on June 1 of that year. “In the past year, [Costco] signaled several times that it was not ready to raise its membership fees given the cost pressures its members were experiencing.”
