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Factors Likely to Impact Costco’s Future Earnings

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Wall Street consensus analyst expectations for Costco

Consensus Wall Street analyst estimates project revenue of $27.6 billion for Costco Wholesale (COST) in fiscal 3Q16—an implied increase of 3.4% YoY (year-over-year). Adjusted EPS (earnings per share) is expected to come in at $1.27 in the quarter, which would represent an increase of 10.1% YoY.

As discussed in part three of this series, Costco’s looking at new warehouse openings, representing a net increase of 30 projected warehouses in fiscal 2016. The company expects to spend $2.8 billion–$3.0 billion on capital expenditure in the fiscal year.

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Cost headwinds

Meanwhile, Costco is looking to raise pay for entry-level workers in the US and Canada by $1.50 per hour. That would take the average starting pay to $13.00 and $13.50 per hour in the US (SPY) and Canada. The retailer estimates the impact of higher wage costs at $0.01 per share in the third quarter of fiscal 2016 and $0.02 per share in each of the next three quarters—that is, 4Q16, 1Q17, and 2Q17—according to Chief Financial Officer Richard Galanti.

That being said, the impact of the wage hike will likely be much milder than the impact of wage hikes on the financials of retailers like Wal-Mart Stores (WMT). For one, Costco already pays a lot better, and for another, the hike is expected to impact a relatively lower number of employees.

Other factors that are likely to negatively impact future earnings are the company’s transition to a new co-branded credit card and higher IT investments. Costco is switching its network provider from American Express (AXP) to Visa (V). The new co-branded cards would be issued by Citigroup (C), which would be acquiring the retailer’s credit card portfolio in a transition that is expected to come about in June 2016.

In the next and final part, we’ll talk about Costco’s dividends and share buybacks.

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