Costco Q4 Earnings Preview: Is Now the Right Time to Buy the Stock?

As Costco Wholesale Corporation COST prepares to unveil its fourth-quarter fiscal 2025 earnings results on Sept. 25, after the market closes, investors face an important decision: Should they buy the stock now or hold their current positions? With earnings expectations and market conditions in mind, it is crucial to evaluate key factors influencing Costco’s performance and whether the stock offers an attractive entry point ahead of its earnings report.

Costco's strategic investments, customer-centric approach, merchandise initiatives and focus on membership growth have enabled it to navigate the market. These strengths have resulted in decent sales and earnings growth, positioning COST as a resilient consumer defensive stock.

Analysts are optimistic about Costco's upcoming earnings. The Zacks Consensus Estimate for fourth-quarter revenues stands at $86.23 billion, representing an 8.2% increase from the prior-year reported figure. On the earnings front, the consensus estimate has improved by three cents to $5.82 per share over the past seven days, implying a 13% year-over-year increase.

Costco has a trailing four-quarter earnings surprise of 0.4%, on average. In the last reported quarter, this Issaquah, WA-based company beat the Zacks Consensus Estimate by a margin of 0.7%.

What the Zacks Model Predicts for COST’s Q4 Earnings

As investors prepare for Costco's fourth-quarter announcement, the question looms regarding earnings beat or miss. Our proven model does not conclusively predict an earnings beat for Costco this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. However, that’s not the case here. You can see the complete list of today’s Zacks #1 Rank stocks here.

Costco has a Zacks Rank #3 but an Earnings ESP of -0.74%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. 
 

Costco Wholesale Corporation Price, Consensus and EPS Surprise

Costco Wholesale Corporation price-consensus-eps-surprise-chart | Costco Wholesale Corporation Quote

Costco: Key Factors at Play

Costco’s growth strategies, competitive pricing and membership-driven business model have been instrumental in its sustained success. By offering products at discounted rates, the company appeals to shoppers seeking value and convenience. The company's bulk purchasing power and efficient inventory management allow it to keep prices low. This disciplined pricing mechanism helps Costco maintain steady store traffic and robust sales volumes. These factors are expected to have a favorable impact on the overall results.

Costco, in its latest August sales report, highlighted that net sales for the 16-week fourth quarter reached $84.4 billion, reflecting an 8% increase from $78.2 billion last year. This growth was supported by strong comparable sales gains across regions and a notable contribution from e-commerce channels. Comparable sales for the quarter rose 5.7%, reflecting a 5.1% gain in the United States, a 6.3% increase in Canada and a solid 8.6% rise in other international markets. 

Furthermore, high membership renewal rates, often surpassing 90%, reflect Costco’s strong customer loyalty and provide a dependable revenue source. Membership fees contribute a steady income stream, regardless of broader economic fluctuations. We expect membership fees to increase 10.5% during the quarter under review. 

Costco continuously evolves to meet shifting market demands, regularly updating its product portfolio to include everyday necessities and unique, high-demand items. This adaptability has fueled Costco's domestic and international expansion, marked by the steady opening of new warehouse locations and the growth of e-commerce platforms in markets such as the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia. E-commerce comparable sales jumped 13.6% during the fourth quarter.

With a clear emphasis on delivering value-oriented offerings, Costco remains well-positioned for continued success in the dynamic retail landscape. However, it is essential to acknowledge the presence of certain headwinds, including underlying inflationary pressures, which may pose challenges. Moreover, margins remain a critical area to monitor, with potential concerns stemming from any deleverage in the SG&A rate. We expect SG&A expenses to increase 6.8% year over year.

Costco Stock Performance

Costco shares have advanced 4.6% over the past year, surpassing the industry’s 3.9% gain. The stock has outperformed peers such as Ross Stores, Inc. ROST and Target Corporation TGT, although it has lagged behind Dollar General Corporation DG.

Shares of Ross Stores and Target have dropped 5% and 44.6%, respectively, while Dollar General stock has gained 19.8% over the same period. 
 

Does Costco Tick the Boxes for Value Investing?

From a valuation standpoint, Costco currently trades at a premium relative to its industry peers. The company’s forward 12-month price-to-earnings (P/E) ratio is 47.13, higher than the industry average of 30.13 and the S&P 500’s 23.52. However, the stock is also trading below its median P/E level of 50.61, observed over the past year. This valuation suggests that while Costco trades below its historical peak, investors are paying a premium relative to the company’s anticipated earnings growth.

Costco is trading at a premium to Target (with a forward 12-month P/E ratio of 10.93), Ross Stores (21.84) and Dollar General (15.82). 
 

Costco Stock: Buy, Hold or Sell Ahead of Q4 Earnings?

Costco’s business model, built on strong customer loyalty and competitive pricing, positions the company well for continued success. However, its premium valuation, along with the Zacks model not conclusively predicting an earnings beat, calls for a cautious approach. For now, holding existing positions seems prudent, while new investors may want to wait for the earnings release for a clearer picture before committing fresh capital.

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This article originally published on Zacks Investment Research (zacks.com).

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