Will Costco Wholesale Start 2017 Strong?

By Dan Caplinger Markets Fool.com

Costco Wholesale (NASDAQ: COST) has produced long-term success that most of its retail peers can only wish they had. Yet even though the company's warehouse retail business model has proven tougher than expected to emulate, Costco still has had to deal with the negative impact from online competition and a change in the way people like to shop. Costco will release its fiscal second-quarter financial report on Thursday, March 2, and investors want to see continued gains in sales and earnings that will prove that the warehouse retailer's business is still healthy.

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Let's take an early look at Costco to see what investors are expecting to see and what you should look out for in its quarterly report.

Image source: Costco.

Key stats on Costco

Expected EPS Growth

9.7%

Expected Revenue Growth

5.9%

Forward Earnings Multiple

26.9

Expected 5-Year Annualized Growth Rate

10.4%

Data source: Yahoo! Finance.

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What's ahead for Costco earnings?

In recent months, investors have been a bit more cautious in their view on Costco earnings, cutting their fiscal second-quarter projections by $0.01 per share and their full-year fiscal 2017 estimates slightly as well. But the stock has soared, climbing 17% since mid-November.

Costco's fiscal first-quarter results showed a bit of improvement compared to the difficult conditions that the retailer faced during its 2016 fiscal year. Revenue climbed 3.2%, and net income jumped by almost 14%. Comparable-store sales managed to pick up 1%, and lower gasoline prices and adverse currency adjustments were responsible for cutting that figure in half compared to the 2% adjusted comps growth that would have prevailed. Membership fee revenue jumped 6%, and evidence that the company's new branded credit card arrangement was helping it save costs came as good news to Costco investors.

Moreover, Costco has seen further improvement in recent months. Comps were up 3% during December, but the real improvement came in January, when Costco posted an impressive 7% leap in comparable sales. Admittedly, now that the retailer has lapped the big declines in gasoline prices, slight increases in what consumers pay at the pump helped to juice some of those numbers higher. However, even adjusting for gasoline and foreign exchange, overall comps of 3% and 5% respectively for those two months bode well for a new push higher for Costco's fundamental growth.

Costco's biggest success has come from identifying the customers who will do it the most good from a sales and profit perspective. Offering a 2% cash back incentive on executive memberships comes with a cost for the retailer, but Costco is able to collect twice the basic annual membership fee, and those customers tend to purchase more than others. In general, credit card users spend more than those who pay by other methods, and that has highlighted the importance of having a solid relationship with a co-branded credit card to ensure that Costco keeps its payment-processing costs as low as possible while encouraging greater spending from shoppers.

Yet Costco still faces a big risk: that shoppers will simply stop wanting to go to its stores. Many people like the Costco experience, with its wide hallways stacked to the vaulted ceiling with merchandise of all types and sizes. However, an increasing number of shoppers in the industry seem more than happy to allow online retailers to deliver their goods to them without ever stepping foot in a store. Costco hasn't ignored its e-commerce portal entirely, and the retailer is showing decent growth in digital sales. Yet Costco still has to make sure it makes its physical stores a place that shoppers want to go, and although it's been successful on that front so far, it will have to keep working to entice younger generations to go where their parents and grandparents shop.

In the Costco earnings report, be sure to look for signs of faster growth going forward. With comps picking up, the warehouse retailer should be enthusiastic about its future growth prospects, and investors will want to see new initiatives aimed at capturing more profit from a hungry shopping public.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.