Costco Q4 Preview: Members Are 'Engaged' Despite Ongoing Macro Uncertainty

Costco Wholesale Corp (NASDAQ:COST) is scheduled to report fourth-quarter results on Thursday, after markets close.

Underlying trends that support the company’s premium valuation "remain intact," including healthy comp growth, steady traffic gains, and strong membership fee income growth, according to BTIG analyst Robert Drbul.

The Costco Wholesale Analyst: Drbul maintained a Buy rating and price target of $1,125.

The Costco Wholesale Thesis: The company is likely to report net sales of $94 billion, up 11.3% year-on-year, and earnings of $6.59 per share for the fourth quarter, Drbul said in the note.

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Gross margin likely expanded 18 basis points (bps) in the quarter, despite pressure due to volatility in gas prices, he added.

The analyst highlighted the following in the note:

• Higher gas prices tend to drive traffic to clubs and Costco Wholesale’s traffic trends are benefiting from this. US traffic ex-gas traffic growth decelerated to 1.8% in the third quarter, representing the softest reading in recent years, Drbul noted. He expects some stabilization or a rebound in the fourth quarter.
• Investors are focused on membership trends, the analyst stated. Renewal rates trends have shown signs of stabilization, as efforts to focus on digitally acquired members are bearing fruit," he further wrote.
• Executive memberships grew by 9.6% year-on-year in the third quarter and now account for about 75% of sales. This reinforces "the importance of that customer cohort to the overall story," the analyst noted.
• Fee income growth is also important to watch, as this decelerated from 13.6% in the second quarter to 10.7% in the first quarter, he added.

"Despite ongoing macro uncertainty, Costco has continued to post healthy comp growth, traffic gains, and membership growth, which suggests that its member base remains engaged," Drbul wrote.

COST Price Action: Shares of Costco Wholesale had declined by 0.39% to $895.86 at the time of publication on Wednesday.

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