Analysts expect strong performance
Costco (COST) has impressed investors with its strong bottom-line performance in the past four quarters. For the fiscal third quarter, analysts expect Costco to sustain the momentum and mark strong double-digit growth in its EPS (earnings per share). Costco’s earnings grew 21.4%, 16.2%, 17.5%, and 12.9% in fiscal Q4 2017, Q3 2017, Q2 2017, and Q1 2017, respectively.
For the fiscal third quarter, analysts expect Costco to post adjusted earnings of $1.68—a 20.0% increase on a YoY (year-over-year) basis.
What could drive Costco’s EPS?
Costco’s adjusted EPS is expected to benefit from its strong sales. Costco has been generating industry-leading comps growth despite witnessing heightened competition in the grocery business from Amazon (AMZN) and other major retailers, which is driving its EPS higher. Favorable currency rates, increased gasoline profits, higher membership fee income, and reduced SG&A (selling, general, and administrative) expenses support Costco’s bottom line growth. Also, a lower effective tax should drive Costco’s EPS higher.
However, investing in price to drive store traffic and margin headwinds could remain a drag on Costco’s earnings.
Notably, mass merchandisers’ profitability is taking a hit from price investments and an unfavorable mix. Walmart (WMT), Target (TGT), and Costco continue to invest in price to drive traffic amid increased competition from Amazon and other deep discounters. Growth investments including strengthening the digital arm remain a drag. However, a lower tax rate cushions the bottom-line growth.