Costco Q3 preview: Will membership fees, comp sales continue to drive profitability?
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Costco (NASDAQ:COST) is scheduled to announce Q3 earnings results on Thursday, May 26th, after market close.
The consensus EPS Estimate is $3.02 (+6.3% Y/Y) and the consensus Revenue Estimate is $51.45B (+13.6% Y/Y).
The membership-only big-box store company reported better-than-expected Q2 results, racking in net income of $1.29B on net sales of $50.94B (+16.1 Y/Y). Membership fee income came in at $967M, up 9.8% Y/Y, while comparable sales were up 11.1% (adjusted).
Investors will be looking at margins, which may have been impacted by higher labor and occupancy costs, increased marketing and other store-related expenses and any deleverage in SG&A rate.
In its Q2 earnings call, Costco (COST) management had acknowledged supply chains challenges and inflationary pressure, including labor cost pressures, shortages of various components and raw materials, port delays and container shortages.
Another metric that investors would be eyeing on is membership fees. The membership format is an integral part of the business and has a significant effect on its profitability. Costco states that, "The extent to which we achieve growth in our membership base, increase the penetration of our executive members, and sustain high renewal rates materially influences our profitability."
Furthermore, investors will look at net sales, particularly comparable sales growth, which is also a key driver of profitability. Costco is more likely to have a profitable Q3, as confirmed by its monthly sales reports which showed that March comparable sales grew 17.2% Y/Y and April comparable sales were up 12.6% Y/Y.
Costco (COST) shares have seen an unusual sell-off in recent times that has increased after disappointing earnings from Walmart (WMT) and Target (TGT). Nevertheless, SA contributor Luca Socci expects this upcoming earnings call to show Costco's resilience and superior business model compared to its peers. Socci rates the stock as "hold" at current prices.
A look at the stock's YTD price performance against Walmart (WMT) and Target (TGT):

Ahead of the earnings report, Evercore fired off a positive tactical trading call on the retailer, with analyst Greg Melich and team seeing more than double digit upside for COST into earnings. They boost the stock's base case price target to $600, which is 40X the 2023 EPS estimate.
Over the last 2 years, COST has beaten EPS estimates 100% of the time and has beaten revenue estimates 75% of the time.
Over the last 3 months, EPS estimates have seen 13 upward revisions and 4 downward. Revenue estimates have seen 20 upward revisions and 1 downward.
Shares have climbed ~15% over the past year