Many investors are avoiding the retailing industry today because of the weak selling environment facing brick-and-mortar companies. Increased competition from online specialists is forcing profit-sapping price cuts. Recently, both Target (NYSE: TGT) and Kroger (NYSE: KR) lowered their earnings outlook as they focus on protecting market share.
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Against that backdrop, Costco (NASDAQ: COST) will post its fiscal fourth-quarter results, and the country's second-biggest retailer should have plenty to say about the retailing industry when it announces its numbers on Thursday, Oct. 5.
Here's what to look for in the report.
We'll find out this week whether Costco's growth momentum is holding up or crumbling in the face of increased competition from online and offline sources. After all, comparable-store sales gains in fiscal 2016 dove to 4% from 7% in the prior year.
A significant part of that slowdown likely came from temporary factors including grocery price deflation and Costco's loyalty credit card switchover, which implies that the warehouse giant should see its expansion pace recover as those issues fade.
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That rebound isn't showing up in the results so far. Through the first nine months of fiscal 2017, comps inched higher by 3%. That's significantly better than the flat results both Target and Kroger have managed over the last six months, but Costco investors will be looking for the company to put even more distance between itself and its retailing peers this week.
The sluggish industry growth trends have convinced many companies to rely on price cuts to keep customer traffic flowing. Kroger's management in June, for example, promised to double down on lowering prices as it dialed back its earnings outlook for the year. "We have no intention of giving up the momentum we've gained on low prices," CEO Rodney McMullen said.
Since it gets most of its earnings from membership fees, Costco isn't particularly vulnerable to these moves. Its gross profit margin, after all, is already far below that of peers -- at 13% of sales compared to 22% for Kroger and Wal-Mart's 26%. Still, it will be interesting to see whether pricing moves by rival retailers have forced Costco to respond.
Healthy membership trends form the foundation for Costco's entire business model. That's why it's good news that the company will likely post a solid bounce in the subscriber base for the fiscal year, mainly thanks to the addition of new warehouses to its store footprint. Costco just last year set a record for member signups in a store it opened in Tulsa, Oklahoma, which is good evidence that the retailer continues to deliver an unbeatable value to its customers.
Management will also update investors on its renewal rate trends this week. These slipped lower in fiscal 2016 in a decline that management blamed mostly on the co-branded credit card shift. However, with the card change behind it, and with members now benefiting from the extra perks it brings, renewal rates should start ticking higher again.
Costco's new credit card is generating significant fee savings for the business, and management is planning to direct almost all of those gains right back to its members in the form of lower prices. That should help Costco continue posting healthy customer traffic trends even as it rolls out its first membership fee hike in over five years.
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