Costco Expected to Announce Dip in Comp Sales Growth

Slowdown Has Spooked Investors Who Seek Firm's Clarity on Expectations Ahead

People in a Costco parking lot

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Key Takeaways

  • Costco's Q1 consensus EPS forecast: $3.11 vs. year-ago's $2.98.
  • The company's shares have dropped 11% this month after weak November comp sales report.
  • Guggenheim analyst expects Costco to take market share from grocery stores in 2023.

Costco Wholesale Corp. (COST), the third-largest U.S. retailer, will probably say tomorrow that net income edged up from a year ago, even as comparable store sales growth are likely to fall short of 11% for the first time in 10 quarters.

Net income probably rose 4.1% to $1.38 billion, or $3.11 a share, as total revenue jumped 9.2% to $55 billion, according to the analyst consensus from Visible Alpha. Comparable store sales, the retail industry's key metric, are likely to have grown by 7.2%, less than half the rate in the same period a year earlier.

Costco, like many peers, is caught in the crosscurrents of a U.S. economy struggling to expand in the face of accelerating inflation and ever-increasing odds of a recession next year. Consumers who turned out in droves for Black Friday sales last month are growing increasingly picky on how they spend their cash.

"People are always value-conscious, but more so now than ever," CEO Craig Jelinek told Yahoo Finance in an interview this week. Demand for some goods, such as jewelry and high-end televisions, has declined, he said.

Costco Wholesale Key Metrics
   Q1 FY2023 (Estimate)  Q1 FY2022  Q1 FY2021
Earnings Per Share ($) 3.11 2.98 2.62
Revenue  ($B)  55 50.4 43.2
Comparable Sales Growth   7.2%  15%  15.4%

Source: Visible Alpha

Investors got an indicator of quarterly earnings last week, when Costco said comparable sales dropped for a third month in November. They fell short of an expected monthly rebound, reinforcing expectations for a sizeable decline in overall quarterly growth.

Amid rising food inflation that has caused consumers to watch their purchases more closely, the company nevertheless posted double-digit growth last year as profit and revenue each rose more than 16%.

Annual comp sales during the year increased 14.4%. Costco benefited from its large scale, allowing it to maintain relatively lower prices than competitors.

Comp sales growth slowed somewhat in September and October, to 8.5% and 6.0% respectively, but investors generally remained positive. The company's stock, after plunging in early spring, gained 33% in the six months between mid-May and the end of November, helping it outperform an otherwise downtrodden U.S. stock market.

Questions Arise After November's Surprise

Investor sentiment changed late last week, though, when the company said its comp sales growth for the month fell to 4.3%, below analysts' predictions.

Add to that Jelinek's comments and the broader U.S. stock market slide early this week, and Costco's shares have dropped 11% in December's first four trading days.

John Heinbockel, an analyst with Guggenheim Partners, foresees the U.S. economy determining the degree to which recent sales growth slowdown might continue. In a note to clients, he predicted comp sales will rise in 2023 as the company continues expanding its market share at the expense of traditional grocery store chains.

Costco's e-commerce sales outlook also may garner close attention in Thursday's report. E-commerce sales on a comparable basis fell 3.7% in the 12 weeks ended Nov. 20, pulled down by a substantial 10.1% decline in November. The decline occurred after a 7.1% gain in e-commerce comp sales in the previous quarter; consensus projections have them inching just 0.2% higher in Q1.

With the company's sales outlook suddenly cloudier than expected, investors also likely will watch for trends in wholesale club's membership figures. Costco has about 55% market share of all wholesale club customers, with Sam's Club and BJ's Wholesale Club trailing considerably in second- and third-place, respectively.

Article Sources
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  1. National Retail Federation. "Top 100 Retailers 2022 List."

  2. Visible Alpha. "Visible Alpha."

  3. Yahoo! Finance. "Costco Wholesale Corp. (COST)."

  4. Costco Wholesale Corp. "Reports Fourth Quarter And Fiscal Year 2022 Operating Results."

  5. Costco Wholesale. "Costco Wholesale Corporation Reports November Sales Results."

  6. Fox Business. "Costco killing it in market against rivals."

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