Can Costco (COST) Earnings Reverse Warehouse Retail Giant’s Slump?

Costco Wholesale (COST) reports earnings after Thursday’s close, with expectations for record revenue and a more than 10% rise in profitability.

The Street is looking for revenue of $94.82 billion vs. $86.16 billion year-over-year (+10.1%) and earnings –per share of $6.48 against $5.87 the previous year (+10.4%). But shares have struggled this quarter, falling roughly 9% since the last earnings report on May 28, and sinking about 17.3% since the all-time highs of $1,096.50 on May 19.

The biggest retail wholesaler club in the United States, Costco’s business model heavily relies on annual membership fees for its profitability rather than product markups with rotating seasonal inventory and loss-leader products like $4.99 rotisserie chickens and a $1.50 hot dog/drink combo. Costco shares have underperformed relative to big-box retailer Target (TGT) during the past year, with a roughly 5% gain compared to Target’s 62% rise. Walmart/Sam’s Club (WMT) is down 1.4% year to date. The recent slide in Costco shares came after June sales growth slowed to 10.6%, along with a generally difficult environment for consumers due to inflation and higher fuel costs.

Here are three things to consider for Costco’s earnings:

Analysts: Several financial firms have taken a more bearish view of Costco during September. Oppenheimer on Sept. 16 said Costco’s core earnings could fall short of expectations when excluding tariff refunds and that consensus estimates represent a “best case scenario” for fiscal 4Q. However, Oppenheimer maintained their Outperform rating and $1,160 price target, saying shares are priced at an attractive entry point with the potential for a special dividend or stock split. Meanwhile, Bank of America the same day lowered their price target to $1,095 from $1,200 and kept their Buy rating, citing a more cautious outlook on margins due to worsening supply chain costs. Deutsche Bank and Bernstein also lowered their price targets earlier this month, to $1,091 from $1,120 and to $1,144 from $1,194, respectively, while keeping their Buy/Outperform ratings.

Technicals: Costco has shown a steady downtrend since its last earnings event, with price forming a downward channel-type shape starting with the post-earnings highs just below $999. Price recently broke through a much sharper short-term downward trendline beginning at about $974 on Aug. 24, with a matching breakout occurring on the Relative Strength Index that tracks momentum. However, any such breakouts heading into earnings should be observed with a wary eye, as fundamental changes from earnings could dramatically change technical observations in a heartbeat. Shares remain below the yearly Volume Profile Point of Control that registers near $918, with volume dropping off sharply below $890.

Options Market: The potential expected move for Friday’s Sept. 25 weekly options expiration is +/-$30.20 (3.3%). Meanwhile, the Oct. 16 monthly expiration comes in at +/-$45.20 (5%), which indicates a potential upside level of around 953 that roughly lines up with the highs after a small downside gap from Aug. 26, as well as potential lows of near $859 that would remain above the 52-week lows at about $844.

This material is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their own particular situations before making any decisions.

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