Costco earnings preview

Will Costco's model help shield it from the price pressures seen by rivals, or will it join the ranks of companies warning about future profits?
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Not the usual downturn

Rising prices would typically be seen as beneficial to the no-frills stores. But the irruption of German budget powerhouses Lidl and Aldi in the US has taken over the bottom end of the market. Unlike Walmart, Costco gets most of its income from membership fees, which might help keep its customer base. And while customers are looking for bargains, they tend to be better off than the average customer at rival chains. 

That might mean the company has a more solid outlook. But, if it follows the steps of FedEx by downgrading its outlook, the market could find this even more worrying that one of the more solid companies is facing issues.

Where to find improvement

Rumours circulated since the beginning of the year that Costco would raise prices, and the earnings release could be an opportunity to make the announcement. Analysts are likely worried about margin compression as Costco faces higher input costs, meaning that if membership fees aren't increased, it could weaken the stock price.

Monthly sales have shown consistent growth above the inflation rate for the last quarter, so the focus is likely on how well the company can manage costs. The subscription model for shoppers has had more resilience, with BJ's performing better than standard sales. On the other hand, stores selling "everything" have had increased margin pressure as shoppers shift buying patterns to focus more on essentials such as groceries.

Costco is expected to report earnings of $4.17 on $70.8B in sales.

CostCo floats around $500

Costco share price is fighting the $500 round support, roughly around the 38.2% Fibonacci of $405-$565. Below both the 200 and 50-day averages, the following Fibonacci supports are at $485 and $465.The golden pocket would be a cluster with the September 27, 22 high. 

If the $500 holds on the CCI divergence, the 50 and 200-averages of $522 and $530 are the first obstacles for bulls. Above there, the $565 swing high is comfortable, and if momentum wanes before, a head-and-shoulders pattern could see prices decelerate towards $400 and beyond in the long run, despite the neckline looking wobbly.

Key takeaways

Costco has a more solid outlook than other retailers due to its membership fees, but if the company downgrades its outlook, the market could find it even more worrying. Analysts are worried about Costco's profit margin if the company doesn't raise membership prices, which may hurt the stock price. And that is despite growth coming above inflation in the last quarter.