Costco Wholesale Corporation Earnings Preview: Continued Growth For Wholesale Club

Costco Wholesale Corporation (NASDAQ: COST), a large subscription warehouse retailer, is expected to report a 16.6 percent rise in its fiscal first-quarter earnings on stronger revenue from increased membership.

The increased result, which has been estimated by analysts surveyed by Thomson Reuters at earnings per share of 93 cents on $23.7 billion in revenue, is expected to have come despite higher fees that the Seattle-based company implemented at the beginning of its fiscal year. The company reports Wednesday before the market opens.

Individual membership was up to 26.7 million in August from 25 million last year, even while small business and executive memberships remained relatively flat. The fee increase is expected to boost earnings through most of 2013 due in part to the timing of annual membership renewals.

Earnings per share will also rise since Costco repurchased $617 million of its stock in 2012, which also should lift earnings throughout 2013, according to Standard & Poor’s.

Increased membership dues and the stock-buyback program will help offset losses due to increased interest payments on $3.5 billion in senior notes the company issued last month to fund a $7 per-share special dividend. Costco joined other listed companies in paying special or earlier-than-scheduled dividends as the capital gains rate is widely expected to jump five basis points to 20 percent next year. As of August, before the recent debt issuance, the company had $1.4 billion in debt and $4.8 billion in cash plus short-term investments.

Tepid job growth and flat wages could cut American consumers’ discretionary spending, thus discouraging some from shopping at subscription outlets. Also, short-term economic and fiscal uncertainties could push people toward basic grocery stores or low-end multibrand retailers like Costco’s primary competitor, Wal-Mart Stores Inc. (NYSE: WMT), which offers both general retail at its eponymous retail chain and its subscription warehouse Sam’s Club.

Costco reported 6 percent September sales growth in stores open at least a year, a key retail metric. In October that figure rose to 9 percent and last month it grew 6 percent. In October the company announced it intends to open between 27 and 30 stores next year, nearly double the annual growth seen since 2009. However, the company has regularly failed to meet its forecasted annual store openings in recent years.

“We think the company is well positioned to generate long-term earnings growth due to new store expansion in both domestic and international markets, and what we view as a strong balance sheet,” Ian Gordon, equity analyst at S&P, said in a research note.

The forecast for Costco’s fiscal 2013 is for an average quarterly EPS to decline from this past fiscal year’s 11.2 percent to 7.5 percent, according to analysts polled by Thomson Reuters. But revenue is expected to rise to $106.2 billion from $99.1 billion. Costco’s revenue includes gasoline sales, so rising gas prices can boost the company’s revenue while not necessarily helping profits. However, rising gas prices encourages customers to go to Costco’s pumps which routinely sell at narrow margin than local competitors. In the last quarter ended Sept. 2, the company reported 27 percent increase in earnings or $1.39 a share.

Costco has seen its share price rise 15.8 percent to $96.50 from the start of the year, Nov. 27, the day before its $7 special dividend was announced that rocketed the share price to a record of $105.92. The company’s share price was up 39 cents to $98.95 on Monday.

Shares closed Monday up 39 cents to $98.95.