Why Costco’s Quarterly Membership Revenue Will Be in the Earnings Crosshairs
Sticky inflation and a membership price increase benefit keep us owners of the shares.
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Heading into Thursday's post-market quarterly earnings report from Costco COST, we have to recognize the shares have been on a tear certainly since early November, but really since the market bottomed in early August.
Since then, COST shares have climbed just under 25%, making them a nice contributor to the Portfolio in that time. Even though that strength has COST shares in overbought levels now, with recent FAO Food Index data revealing an upward trend in key categories and other November data pointing to inflation remaining sticky, we continue to see more road ahead for COST shares. Part of that stems from consumers still feeling the pinch of higher prices, but also the layering of higher membership fee revenue as the September 1 price hike reverberates across the entire membership.
Because of the strong run in the shares and due to their being overbought, it’s fair to say expectations are running high heading into Thursday's earnings report. There is usually quite a bit to parse in Costco’s results and we suspect folks will be interested in what it is seeing on inflation and with the consumer, given that we have less than two weeks until Christmas. There could also be some conversation around President-Elect Trump’s tariff talk and how that might impact Costco. We’ve been reading and hearing that some companies are pulling forward product delivery to minimize tariff risk, and we’ll be interested to see if Costco is making any such moves.
With Costco reporting monthly sales figures, there should be few surprises with the quarter’s net sale figure, but we expect much interest will be had with the membership fee revenue line. As we discussed above, this will be the first report that will feel the effect of the recent membership fee price hike. Lending a helping hand, Costco had more than 25 new warehouse locations open during the November 2024 quarter compared to the year-ago one, with plans to expand its footprint further in the coming quarters.
Because that membership revenue stream equates to roughly half of Costco’s income before taxes, stronger-than-expected results could lead Wall Street to lift its EPS expectations for the coming quarters. That could trigger some price target increases as well. With only a penny being added to November quarter EPS expectations over the last 60 days despite Costco’s stellar monthly sales reports, it’s fair to think we could see a better-than-expected print on Thursday afternoon.
We’ve had a few members ask if we could see a stock split for Costco shares. The company has done so in the distant past, so we wouldn’t rule it out, but because the last two-for-one split was in January 2000, the odds are low. The other item Costco has done from time to time is declare a special dividend. We saw that last year with a $15 per share special dividend, a $10 one in 2002 and a $7 special dividend in 2017. We haven’t seen Costco declare back-to-back special dividends, so expectations are probably low for that happening.
Should the market not be pleased with Costco’s results and we see the shares fall near $925, that would offer a nice pickup point for members.
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At the time of publication, TheStreet Pro Portfolio was long COST.
