As Costco Wholesale Corporation COST prepares to unveil its second-quarter fiscal 2025 earnings results on March 6 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 second-quarter revenues stands at $63.2 billion, which indicates an increase of 8.2% from the prior-year reported figure. On the earnings front, the consensus estimate has improved by three cents to $4.09 per share over the past 30 days, implying a 10.2% year-over-year jump.

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Costco has a trailing four-quarter earnings surprise of 2%, on average. In the last reported quarter, this Issaquah, WA-based company surpassed the Zacks Consensus Estimate by a margin of 0.8%.

What the Zacks Model Predicts About COST’s Q2 Earnings

As investors prepare for Costco's second-quarter announcement, the question looms regarding earnings beat or miss. Our proven model predicts that an earnings beat is likely 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, which is the case here. You can see the complete list of today’s Zacks #1 Rank stocks here.

Costco has an Earnings ESP of +0.14% and carries a Zacks Rank #2. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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. These factors are expected to have a favorable impact on the overall results.

The company's bulk purchasing power and efficient inventory management allow it to keep prices low. This competitive pricing strategy helps Costco maintain steady store traffic and robust sales volumes. We foresee comparable sales growth of 4.3% during the second quarter, which indicates an expected increase of 4.3%, 4.2% and 4.1% in the United States, Canada and Other International locations, respectively.

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 by 8.1% 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. We expect e-commerce comparable sales to jump 18.5% during the quarter under discussion.

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 5.5% year over year.

Costco Surges Ahead, Leads the Pack

Costco has witnessed an impressive surge in its stock price over the past six months. The stock has rallied 17.8%, outpacing the industry’s rise of 8.9%.

COST has outperformed its competitors, including Ross Stores, Inc. ROST, Dollar General Corporation DG and Target Corporation TGT. Shares of ROST, DG and TGT have faced declines of 7.6%, 8.6% and 18.6%, respectively. 

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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 55.59, higher than the industry average of 33.05 and the S&P 500’s 21.96. The stock is also trading above its median P/E level of 49.57, observed over the past year. This elevated valuation suggests that investors might be paying a premium relative to the company's anticipated earnings growth.
 

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Buy Costco Now or Wait for a More Attractive Entry Point?

Costco has strengthened its position as a retail powerhouse, thanks to its strong membership model, competitive pricing and ability to adapt to evolving market trends. While the stock’s premium valuation might deter some investors, its steady growth, robust financial health and strategic initiatives indicate the potential for further upside. Current investors may consider holding or adding to their positions, while prospective investors could see any dips as a buying opportunity.

Costco’s Strategic Moves Signal Promising Q2 Outcome

Costco is poised to deliver a decent second-quarter fiscal 2025 earnings report, supported by its strategic growth initiatives and loyal customer base. The anticipated growth in revenues and earnings highlights the strength of its membership-driven model and pricing strategy, which continue to attract value-seeking consumers. For investors seeking a stable yet growth-oriented stock, Costco appears to be a compelling choice.

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Target Corporation (TGT) : Free Stock Analysis Report

Dollar General Corporation (DG) : Free Stock Analysis Report

Costco Wholesale Corporation (COST) : Free Stock Analysis Report

Ross Stores, Inc. (ROST) : Free Stock Analysis Report

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

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