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Why Costco’s EPS Could Rise Sharply in 2019

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Dec. 4 2020, Updated 10:53 a.m. ET

Earnings to grow at a healthy rate

Costco (COST) has managed to increase its earnings at a rapid pace in the past several quarters. Costco’s earnings have grown at a double-digit rate for the past seven quarters with an average growth rate of 17.3%. Higher sales and a lower effective tax rate supported the company’s bottom-line growth. However, investments in price remained a drag on margins, in turn, affecting its EPS growth rate.

Wall Street analysts expect Costco to sustain the growth momentum in fiscal 2019. Analysts expect Costco’s EPS to grow by ~9% in fiscal 2019, which is impressive, as the company faces tough YoY comps. Costco’s EPS has grown by about 22% in fiscal 2018.

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Wall Street also expects Target (TGT) to sustain its earnings growth momentum in fiscal 2019. However, its rate of growth is likely to remain lower than that of Costco. Analysts expect Target’s EPS to increase by 4% in fiscal 2019. Meanwhile, Walmart’s (WMT) bottom line is projected to decline on a YoY basis.

What’s driving Costco’s bottom line?

Costco’s earnings are gaining from its strong growth in comps. Costco has been outperforming rivals with its industry-leading comps, which in turn, are driving its earnings. Meanwhile, the company’s higher membership fee income and control over overhead costs further support the bottom-line growth. Also, a decline in the effective tax rate cushions earnings. However, weak margins continue to hurt the company.

The company’s peers are also benefitting from a considerable decline in the effective tax rate. However, value pricing amid increased competition and higher digital fulfillment costs remain a drag.

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