Why You Should Be A Buyer Of Costco Shares Into Its Q4 Print

Previewing Costco Wholesale Corporation COST's fiscal year fourth-quarter results, Baird said it expects solid results from the company. The company is scheduled to release its results after the market close on Oct. 5.

As such, the firm reiterated its Outperform rating and $200 price target on Costco shares.

The reiteration was attributed to:

• Fundamental health — characterized by strong traffic/comps, emerging MFI or membership fees and other income.
• Profit tailwind.
• Improved forex backdrop.
• Relative attractiveness of valuation.

Raising Estimates

Following stronger monthly sales, analyst Peter Benedict said he raised his fourth-quarter earnings per share estimate by 5 cents to $2 per share, which is in line with the Street. The analyst also raised his 2018 estimate from $6.35 to $6.40 but maintained his 2019 estimate at $7.

Benedict is of the view that core comps is accelerating. Premised on healthy traffic gains of 4 percent, the analyst raised his fourth quarter comp estimate from 4.5 percent to 5.7 percent. The analyst attributed the acceleration in comps from the 5 percent in the third quarter to a blend of traffic and ticket against a backdrop of easier compares.

"Looking ahead, we expect comps to remain strong/best-in-class as COST continues to drive footsteps to the club, deflation abates, and tobacco declines are cycled," the analyst said.

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E-Commerce Sales, MFI Improving

Baird termed the improvement seen in e-commerce sales in August as encouraging, achieved on the back of investments across multiple areas of the business such as improved site functionality, expanded assortment and faster delivery.

The firm also expects the management to shed light on plans to drive further omni-channel capability improvements on the fourth-quarter earnings call.

Additionally, Baird expects MFI growth to accelerate. The firm expects the increase to provide the company a valuable tool to use as it executes its proven strategy of driving loyalty/sales.

Dissecting The P/L Statement

Though the firm expects another quarter of merchandise margin expansion on a core-on-core basis, it believes headwinds from LIFO and gas will depress reported gross margin. However, the firm sees slight EBIT margin expansion due to operating leverage on strong top-line growth.

"While the evolving omni-channel competitive landscape will likely linger as a concern in the market, we believe COST is particularly well positioned to compete (superior quality/value equation, loyal member base) and take share, and expect healthy fundamentals to continue into FY18," the firm concluded.

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