By Praveen Paramasivam and Ananya Mariam Rajesh
(Reuters) – Costco Wholesale Corp is expected to post a rise in quarterly earnings on Thursday as the spending power of Americans with store memberships remains largely intact even as surging inflation dents profits of major U.S. retailers.
Walmart Inc and Target Corp’s bleak profit forecasts have left the retail industry rattled and highlighted the wariness of low-income households to spend on discretionary goods.
Costco, however, lies in a sweet spot, as an average shopper at its warehouses makes much more in a year than a typical Walmart and Target customer, and the warehouse club operator’s efforts to keep gas prices several cents below the national average also drives memberships.
Graphic: Most of Costco customers have household income of over $100k a year – https://graphics.reuters.com/USA-RETAIL/mopanzwljva/chart.png
“The American consumer will go out of their way to save money on gas,” D.A. Davidson analyst Michael Baker told Reuters. “The gas business drives traffic to the parking lot, and then somewhere between 30% and 50% of those customers end up going into the club and buying something.”
Membership fee income forms a bulk of the profits at Costco.
CONTEXT
Costco’s smaller rival operator BJ’s Wholesale Club Holdings Inc last week reported a quarterly profit above estimates, as higher-income customers shopped more and made up for a slowdown in spending from others.
Several chains have pointed to customers preferring lower-priced private labels owned by stores, which typically boost grocers’ margins, to national brands. The trade down will likely benefit Costco’s in-house Kirkland Signature brand.
THE FUNDAMENTALS
* Analysts polled by Refinitiv, on average, expect Costco to earn $3.04 per share for the third quarter, an increase of over 10% from a year earlier.
* Costco reported same-store sales growth, excluding the impacts from changes in gasoline prices and foreign exchange, of 12.2% and 8.7% for March and April, respectively. The chain’s third quarter typically ends in early May.
Graphic: Costco’s net income to outperform Walmart and Target – https://graphics.reuters.com/USA-RETAIL/movanzwgxpa/chart.png
WALL STREET SENTIMENT
* The current average rating among 37 analysts is “buy”, with none of them having a “sell” rating on the stock.
* The median price target (PT) is $581.50, 33% above Tuesday’s close and 3% lower from a month earlier, in light of five PT cuts since Walmart’s results.
(Reporting by Praveen Paramasivam and Ananya Mariam Rajesh in Bengaluru; Editing by Shounak Dasgupta)
