3 Things to Watch When Costco Posts Earnings Results This Week

By Markets Fool.com

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Image source: Costco.

Costco (NASDAQ: COST) will post earnings results for its fiscal fourth quarter on Thursday, Sept. 29. Investors aren't expecting great things out of the world's second-largest retailer. It has missed earnings estimates lately while reporting slowing sales growth in each of the last three quarters. On the other hand, the warehouse giant enjoys some of the strongest customer traffic trends in the industry, and its subscription model produces higher profits even during soft selling environments.

This week's quarterly report should show evidence of the strength of that selling approach, despite the fact that consensus estimates are targeting just 3% higher sales and flat earnings for Costco. Here are a few key points for investors to watch in addition to those big-picture figures.

How big of a problem is deflation?

Deflation has been a huge drag for grocery retailers over the last few months. Krogerin early September saw its comparable-store sales growth nearly cut in half as it lowered its comps outlook for the first time in years. Falling prices for products like meats, dairy products, and eggs combined to push overall food prices down by about 1.5% as the industry suffers through its first bout of deflation since 2009.

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Grocery price change against the year-ago period. Image source: Federal Reserve Economic Data.

Costco gets about half of its revenue from food sales and in that way is more comparable to Wal-Mart (NYSE: WMT). The retailing titan in August said that deflation cleaved a full percentage point from its grocery business in the second quarter, but that didn't get in the way of posting solid overall growth.

It will be interesting to hear where Costco falls relative to these two retailers on the subject, given that sales growth at its U.S. warehouses has ticked lower in each of the past three quarters.

Was the credit card switch worth it?

Management will likely spend some time talking about Costco's loyalty card switchover in this week's conference call. After all, moving from an American Express-branded card to a Visa one was a major operating shift that affected over 10 million existing members.

Investors have so far only seen the negatives from this move. It has cost the retailer over $40 million in lost signup revenue and confusion over the switch might have caused the slight decline in renewal rates last quarter (to 94.4% from 94.5%).

It's also possible that the change has gone over smoothly with Costco's members. If that's true, then the upgraded rewards bonuses should contribute to a more engaged subscriber base -- and might even help the retailer improve on its already stellar renewal rate that for the past two fiscal years has been 91%.

Annual renewal rates by fiscal year. Data source: Costco financial filings.

Is a membership fee hike on the way?

Given that the majority of Costco's profits comes from membership fees rather than product sales, investors are keenly interested in the company's plans for boosting that annual charge. They haven't had much to celebrate on that front since the last increase came in early 2012, or nearly five years ago.

Still, a steadily rising membership base has helped push net income higher over that time, even though the subscription price hasn't budged. Costco hasn't said when it plans to implement its next boost, but Chief Financial Officer Richard Galanti pointed out to investors in its last conference call that the company has increased prices at an average of once every 5.5 years. If it sticks to that pace, then a hike should be coming at some point during its 2017 fiscal year.

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Demitrios Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool owns shares of and recommends Costco Wholesale and Visa. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.