Costco Stock Has a Lot to Prove This Week

It may not always be a bull market, but for Costco Wholesale (NASDAQ: COST) investors it's always a bulk market. The country's leading warehouse club operator has been a consistent wealth creator, a 400-bagger since going public 32 years ago. Success is measured in decades, not quarters. However, shareholders should still pay attention when Costco steps up with fresh financials this week.

The iconic chain will report its fiscal second-quarter results on Thursday, shortly after the market close. The shares have been resilient lately. Costco is trouncing the market with a 14% gain this young year against a surprisingly flattish S&P 500 through the first two months of 2025 trading. It has risen by more than 40% over the past year. Expectations are reasonable, but Costco may have to perform better than that to keep its recent upticks.

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You don't need a Costco membership to enter into this financial preview. Let's go take a look around.

Hoping to stick the Kirk-landing

Wall Street pros see revenue rising 8% to hit $63 billion for the 12-week period ending in mid-February. The bottom-line forecast is even more modest. Analysts are modeling a profit of $4.10 a share, less than a 5% year-over-year increase. Costco has landed ahead of the market's quarterly profit targets over the past year, but they have all been just single-digit percentage beats.

The market tends to have a good read on Costco -- at least on the top line -- because the retail stocks bellwether puts out monthly updates for the first two months of a reporting period. Costco has already said that total sales rose 9.2% in December, accelerating to a 9.9% jump in January. Domestic comps also stayed north of 9% in each of those reports, with e-commerce sales clocking higher and its international performance languishing relative to its home market. Will February be bad enough to drag fiscal second-quarter sales down to the 7.8% increase that analysts are projecting?

What about the bottom line? Analyst estimates have been inching higher since the last financial update. Wall Street pros went from eyeing a quarterly per-share profit of $4.01 three months ago to $4.05, $4.07, and now $4.10 in the subsequent months. Food retail has seen some inflationary spikes in products including eggs and coffee, but Costco has a track record of managing the ups and downs of retail pricing. It would also be ironic if margins are getting squeezed after Costco pushed out a $5 to $10 increase for its annual membership plans in September.

The increase itself isn't likely to have rattled Costco's rolls. Increasing its entry-level Gold Star plan from $60 to $65 and its business-geared Executive tier from $120 to $130 is actually less than many bulls expected. It's the smallest increase on a percentage basis of the eight hikes it has pushed out since opening its doors back in 1983. It had also been seven years since the last membership boost, the longest gap between hikes that had previously happened between two and six years apart.

Image source: Getty Images.

The model just works

Costco serves its customers with thin markups. Membership fees account for roughly 2% of its total sales, but with a trailing net margin of 2.9% the memberships translate into the lion's share of its bottom line. An increase -- even a lower-than-expected one -- should materially boost its profitability.

The chain earned $4.04 a share in its fiscal first quarter, its first full financial period with the new pricing in place. Analysts were only holding out for a profit of $3.80 a share. This should be yet another earnings beat for Costco, unless the operating landscape for warehouse club operators soured faster than the market is currently modeling for.

Costco can't afford a miss. The stock isn't cheap at 57 times this fiscal year's net income projection or even 52 times fiscal 2026's target. The shares have outpaced the fundamentals over the past year, but the same can be said for even longer stretches of time. Costco has earned the right to a hefty market premium. It has earned its all-weather stripes. There was only one year -- a 1.5% decline in fiscal 2009 during the Great Recession -- in which Costco didn't deliver positive top-line growth in its more than three decades of public trading. CEO Ron Vachris has only been at the helm for a year now, but he's a Costco lifer who began working at the company as a forklift operator 40 years ago -- the chain hasn't skipped a beat in the handoff.

Betting against Costco because the stock isn't as cheap as its value proposition for members hasn't paid off for the naysayers in the past. Costco should be able to prove its worth to the market on Thursday afternoon, too.

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Rick Munarriz has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.