What to watch when Club holding Costco reports quarterly results Thursday

Published Wed, Dec 7 202210:33 AM ESTUpdated Wed, Dec 7 202210:42 AM EST

Club holding Costco Wholesale (COST) is set to report its fiscal first-quarter results on Thursday after the closing bell, and we'll be looking to see the impact on profitability at the retailer as shoppers pull back on spending this holiday season. Costco, which operates more than 830 club warehouses worldwide, is known for offering low prices on a wide array of items including, groceries, apparel, jewelry and gasoline, allowing consumers to buy in bulk at a discount. The membership-only retailer has posted durable sales growth over the past year, but as of late Costco's same-store sales, which are reported monthly, have shown softer growth due to a slower global economy and weaker consumer demand. At the same time, Wall Street sees a long-term growth trajectory for Costco despite near-term macroeconomic uncertainty. Bernstein in a note Tuesday said the retailer has delivered "routinely solid business results." UBS called Costco's business model "highly relevant." Analysts expect 2023 fiscal first-quarter earnings-per-share to come in at $3.11 a share, up 4.4% from the same period last year, while total revenue should climb 8.5% year-over-year, to $54.64 billion, according to estimates from Refinitiv. Here are some of the key factors the Club is looking for ahead of the earnings print on Thursday. Gross margin Costco shareholders will be looking for an improvement to its gross profit margin, or the percentage of revenue that's left over after subtracting the costs of producing its goods. Costco's gross margin has been lower over the past several quarters due to inflationary pressures like higher freight and labor costs, as well as supply chain disruptions. Some of these pressures have been easing but Costco's gross margin likely contracted in its fiscal first, according to UBS, with greater gasoline sales at lower prices being the "biggest drag." Earlier this year, Costco benefitted from higher gas prices, as customers flocked to the retailer to buy gas in bulk. While that can boost the retailer's top-line sales growth, gasoline can also weigh on profitability because it's a low-margin product that generates fewer profits than other Costco's business categories. And if gas prices continue to moderate, profits from gasoline sales could prove unsustainable, according to UBS. "COST's [gross margin] has been pressured in recent quarters from negative price mix relating to outsized gas sales. We suspect some of this continued in 1Q but likely to a lesser extent," analysts at UBS wrote in a recent note. Sales growth Costco last week said total company core sales for November grew by of 5.3% , well below the the 8.5% growth predicted by analysts. During the month, its grocery business was stable but non-food discretionary categories underperformed. Costco attributed the weaker month to softer online sales for electronics, signaling a risk to fiscal first earnings, even as management said sales improved toward the end of November. Costco's monthly sales growth has slowed in recent months, at 6.7% in October and 8.6% in September, hurt by weaker consumer demand for non-essential items like electronics and clothes. Still, Wall Street largely thinks Costco is a top pick for holiday shoppers this season. UBS anticipates strong top-line performance and steady member traffic in its fiscal first, as members look for discounts on holiday gifts. "We are believers that COST is well positioned for late holiday shoppers this year," UBS analysts wrote. At the same time, Costco's U.S. comparable sales growth is stronger, on average, than that of competitors BJ's Wholesale Club (BJ) and Walmart 's (WMT) Sam's Club, according to UBS. Analysts at Bernstein called Costco a "destination defensive stock, a much coveted port in the storm of macro uncertainty that's engulfed the consumer landscape" and predict a "strong stable performance" for the company in the long term. Bottom line We like companies that can sustain growth in a tough economy. While Costco's sales growth has come under pressure, revenue is still growing, albeit at a slower pace. And if, as management indicated, there was an acceleration in sales in late November, there could still be an upside to sales growth in the quarter. Importantly, we would like to see an improvement in Costco's gross margin, which could bolster the stock price. Shares have fallen roughly 10% over the past week, with the stock trading up 0.47% Wednesday, at $483.44 a share. We sold some shares and locked in a profit last week amid the recent weakness. Ultimately, Costco has remained resilient compared to its retail peers. Despite the slower economy, people are still willing to pay Costco's monthly membership fee, with renewal rates at record highs. Costco customers have stood by the retailer's strong value proposition. We're cautious in the near term, but still see Costco as a long-term play and a high-quality company with ample room for growth. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) 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 . 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