What to expect when Costco reports earnings after the closing bell Thursday

Published Thu, Sep 22 20226:00 AM EDTUpdated Thu, Sep 22 20221:34 PM EDT

Club holding Costco (COST) is set to report a surge in fiscal fourth-quarter earnings after the closing bell on Thursday, despite a barrage of macroeconomic headwinds. The retail sector has been weighed down this year by stubbornly high inflation, which has eaten away at profit margins and increased labor and input costs. But Costco has proved resilient — and we've long held it is the best-run retailer in the world. Costco's earnings-per-share are expected to be $4.17 on revenue of $72.04 billion, according to estimates from Refinitiv. That compares with EPS of $3.90 and revenue of $62.7 billion during the same period a year prior. Competitive advantage Part of Costco's DNA is to provide value to its customers through its competitively priced, broad-based merchandise. The wholesale retailer accomplishes this through a high-volume, low-cost business model, allowing it to price goods even cheaper than competitors like Walmart (WMT) and Target (TGT). We believe this member-focused wholesale subscription business can keep driving Costco's top-line growth in a tough economy. This strategy has already proved Costco can deliver on earnings, which is why we're expecting solid results in its fiscal Q4. In its fiscal third quarter earnings , released May 26, Costco's total revenue increased 16% year-over-year, to $52.6 billion. Included in that number, revenue from membership fees came in at $984 million, up 9.2% year-over-year. Costco ended its third quarter with 116.6 million total cardholders, an increase from 114.8 million total cardholders the prior quarter. Renewal rates in the U.S. and Canada hit an all-time high of 92.3%, while the worldwide rate came in at 90% for the first time in Costco's history. Historically, Costco has raised membership fees every five to six years, with the last increase in June 2017. But given the difficult macro environment, the retailer has decided to hold off. We think this decision shows the company is in a strong position, signaling it doesn't need immediate relief from inflation. On the other hand, Walmart-owned Sam's Club announced last month an increase in its annual membership fees come October. Wall Street also recognizes Costco's competitive advantages. Bank of America, which reaffirmed its buy rating earlier this week, said Costco is well positioned in the current environment, citing the company's healthy consumer traffic growth, strong membership renewal rates, and a growing international division. BofA sees a premium valuation for the retailer, assigning a price objective of $605. That's 22% higher than Wednesday's close. And for good reason. Costco has been able to effectively navigate high inflation by staying true to its business model. The company's goal is to partner with vendors to mitigate price increases, helped by Costco's high-volume business with its suppliers. Above all, Costco CEO Craig Jelinek thinks of the retailer as the "price police," he said in an interview with Jim Cramer last week . More broadly, Jelinek thinks commodity inflation has been slowing and overall inflation has peaked. "I think you're going to see maybe another six-months-to-a year, things will start to come down. If you start to see now, fuel prices are coming down, which is a big part of distribution costs," he said. Despite the continued economic uncertainty for consumers, one area where Costco customers have been finding real bargains is gasoline, which was one of the company's biggest revenue centers in its third quarter as U.S. gas prices reached historic average highs this past summer above $5 per gallon. "The industry demand in gallons for gas is in the 1%-2% range and what I can tell you is we are much better than that in the high teens and low 20s in terms of where we've been trending," Jelinek said during the company's third quarter earnings conference call. Bottom line Unlike most public companies, Costco announces sales figures every month, in addition to its regularly scheduled quarterly reports. Those monthly numbers have been coming in strong. For this reason, we'll be paying special attention in the current inflationary environment to areas of the business with less visibility such as margins and earnings performance. We do not believe a membership fee price increase is imminent. But based on what the CEO recently told Jim, Costco has the pricing power to do so when it believes the timing is right, according Jeff Marks, director of portfolio analysis at the Club. "With a balance sheet flush with cash, we'll look for management's thoughts on how they are approaching capital allocation," Marks said. Costco shares have an annual dividend yield of 0.74%. "In any event, we view Costco as a consistent, high-quality retailer with a fantastic business model that allows them to succeed in any economic environment," he added. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) — Correction: This story has been updated to reflect that shares of Costco have an annual dividend yield of 0.74%. An earlier version misstated the number. As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A consumer shops in a Costco store in Miami on Sept. 28, 2021.

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