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What To Expect From Costco’s Stock Post Q4 Results?

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[Note: Costco’s fiscal year ends in August]

Costco (NASDAQ: COST) is set to announce its fiscal fourth-quarter results on Tuesday, September 26. While revenue is expected to slightly surpass expectations and earnings to be in line, it’s worth noting that the company has managed to grow despite the pandemic and inflation. Consumers have been stocking up on essentials in bulk to keep costs down. Unlike other retailers, Costco generates the majority of its profits from membership fees, so comparable sales growth is not as crucial for its success. In fact, membership fee income was 6% higher in Q3 than the previous year, and the number of card members increased by 7% over the same period. The high renewal rate of 92.6% in the U.S. and Canada not only ensures a steady stream of revenue but also increases the lifetime value of each customer. Costco also boasts a net cash position of nearly $14 billion, with only $6.5 billion in long-term debt, highlighting its ability to thrive in the dynamic retail landscape.

Our analysis forecasts Costco’s valuation to be $564 a share, which aligns closely with the current market price. For a more detailed analysis of Costco’s Q4 earnings preview, please refer to our interactive dashboard here.

Interestingly, COST stock has shown a higher Sharpe Ratio of 0.9 since early 2017 compared to the S&P 500 Index’s figure of 0.6 during the same period. The Trefis Reinforced Value portfolio boasts a higher Sharpe Ratio of 1.2, indicating the potential for strong returns with relatively low risk.

Expectations for Q4 Results

1) Revenues: Trefis estimates Costco’s Q4 2023 revenues to be $78.5 billion, slightly above the consensus estimate. In Q3, the company saw a 2% year-over-year revenue growth to $53.6 billion. While Costco experienced weaker-than-usual comp store sales growth in Q3 at only 0.3%, this was offset by higher traffic volumes, which increased by 4.8% year-over-year.

2) Earnings per Share (EPS): Costco is expected to report an EPS of $4.77 for Q4 2023, in line with the consensus estimate. In Q3, the company’s earnings per share dropped from $3.04 the previous year to $2.93 due to supply chain pressures.

A membership fee increase is unlikely this year due to high inflation. However, it is expected to happen in the near future. Costco typically raises its fees every five years, with the last increase occurring in 2017. This should further enhance the company’s profitability.

Valuation and Comparison with Peers

Based on Costco’s valuation, with an estimated EPS of $14.08 and a P/E multiple of 40.0x in fiscal 2023, the price is projected to be $564, which aligns with the current market price. Investors have been impressed with Costco’s consistent ability to generate higher sales and profits, leading to an elevated P/E ratio compared to its peers, even before the onset of the pandemic.

It is worth comparing Costco’s performance to its peers. The table below provides key return metrics for COST, the S&P 500, and the Trefis Reinforced Value Portfolio:

Returns Sep 2023
MTD [1]
YTD [1]
Total [2]
 COST Return 2% 22% 249%
 S&P 500 Return -4% 13% 93%
 Trefis Reinforced Value Portfolio -6% 23% 532%

[1] Month-to-date and year-to-date as of 9/25/2023
[2] Cumulative total returns since the end of 2016

Investors interested in market-beating portfolios may consider investing with Trefis Market Beating Portfolios. For more price estimates and information, please refer to Trefis Price Estimates.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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