Fourth Quarter Costco Profit Snapshot: What to Watch

Investors have big questions before Costco‘s (NASDAQ: COT) report on fourth quarter and full year results. In a few days, the warehouse giant will unveil detailed sales and earnings trends while commenting on its outlook for the final months of fiscal 2021.

We already know that the channel had significant customer traffic until the end of its financial year at the end of August. But Thursday’s announcement will show the price pressure on the retailer. Wall Street might even get an update on management thinking about a likely increase in membership fees in fiscal 2022.

Let’s take a closer look.

Image source: Getty Images.

Prices and costs

Costco already revealed in early September that it was finishing his exercise on a high note. Sales increased 9% in August and the fourth quarter. Same-store sales increased 13% for the full year 2021, placing the retailer ahead of its peers as Walmart (NYSE: WMT) and Kroger (NYSE: KR).

What we don’t know yet is how much of Costco’s business has been under pressure from pricing issues. Kroger recently reported that its profitability fell as the supermarket giant kept some prices low even as inflation pushed costs up.

Costco aims to be a price leader in the industry, so it could report even more gross margin nip. But keep in mind that the Warehouse Club derives most of its revenue from subscription fees, which means it can operate with significantly lower merchandise margins than its rivals.

COST Gross Profit Margin Chart

COST Gross profit margin given by YCharts.

Subscriber metrics

Costco releases its sales figures every month, but investors have to wait for its quarterly earnings reports to see important subscriber metrics. We’ll find out on Thursday how many new members the channel has attracted, including those who have opted for its premium tiers. Membership revenue, which accounts for the bulk of its revenue, is expected to show robust growth as buyers continued to spend freely until the end of August.

Keep a close eye on Costco’s renewal rate. This metric hovered around historic highs of 91%, reflecting deep satisfaction with its selection, pricing and multi-channel sales platform. Another good performance here would imply healthy momentum as the crucial holiday shopping season approaches.

Look ahead

The management team could point out supply chain challenges for the rest of the year, given the shipping bottlenecks in the industry today. The most likely impact of these issues would be lower profits as Costco spends more money on freight to maintain good inventory levels.

On the flip side, Wall Street is eagerly awaiting to hear about a potential increase in Costco’s annual membership fees, as a boost directly translates into higher earnings.

The retailer typically increases subscription fees every few years, and buyers might be receptive to the next increase in today’s inflationary atmosphere. Costco’s scale allows it to offer considerably lower prices in an environment like this, after all, which makes a membership more valuable.

Either way, look for Costco to comment optimistically on its growth initiatives, including adding new warehouses in the US and international markets, expanding its home delivery network, and gaining stakes in niches such as fresh produce, consumer electronics and home furnishings.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

Comments are closed.