COST Earnings to Offer 'Temperature Check' on U.S. Consumer Strength

SPEAKER_1 (0:01)

We're back on Morning Trade Live and looking at some big retail stocks this morning. We've got Target trading up 6 tenths. Walmart and Costco, though, are both lower. Walmart is underperforming.

We've got Costco reporting earnings after the bell today. One of the last cabs off the rank here. So let's go inside out on Costco, preview that earnings report now with Melissa Otto, head of Visible Alpha Research, S&P Global Market Intelligence. Nice to see you, Melissa. Thank you so much for your time today. What are you expecting this afternoon?

SPEAKER_2 (0:30)

Hey, Sam. Great to be here.

I'm dialing in from Heathrow Airport, one of the more amusing places to do a spot with you.

So I think Costco is going to be very interesting. It's a great read on what the temperature check is of the US consumer. I think coming into the quarter, Visible Alpha consensus numbers have been getting revised up. Really since March, we've seen them climb higher by about $2 billion for revenues. This has really been driven by the US.

I think margins have been remaining stable for this year and next year. They're expected to be 3.5 percent. I think it's going to be really telling to hear what the company says about traffic and about their membership. So those are going to be some of the things we're looking at.

SPEAKER_1 (1:27)

Yeah, I was going to say, first of all, I'm very impressed that you managed to find such a quiet spot in Heathrow Airport.

I hope you're in Terminal 5 because I know that the lounge has a very nice Australian wine in there. But anyway, we'll park that one. Yes, you mentioned the membership fee metrics. I know that investors have been closely monitoring that. What would you like to see, particularly on the membership counts, the upgrades and overall renewal rates? What would be kind of the gauge of success here?

SPEAKER_2 (1:57)

So I think we've seen numbers getting revised up into the quarter. I think for the full year, right now the market is looking for about 39 million and then 42 for next year. So I think you're continuing to see around that 10 percent growth level.

So I think retention is particularly in the executive memberships are likely to be key. I think that'll be an area that the market really focuses on. This has been a really, I think a sweet spot for the company in terms of what has been driving their fundamentals and overall supporting their business model and higher valuation.

SPEAKER_1 (2:41)

And obviously, it's been a very high bar that have been set by some of the others. I mean, this is, as I mentioned, one of the last cabs off the rank. I mean, it's no mystery, particularly with some of the sales numbers, because we do get regular updates on that. But I'm wondering, as far as the competition and partnerships, what are investors looking out for, as far as what management's got to say regarding market share versus some of the others?

SPEAKER_2 (3:12)

I think Costco is a unique model, and I think one of the things that we're seeing with Walmart is that their online strategy has really picked up some compelling momentum in the market.

There's already a pre-existing strong foothold in online. You wonder what they may say in terms of their strategy around some of these dynamics, I think that that may be an interesting area of exploration. I think a second thing too is around their traffic and around gas prices. Gas prices are a positive and a negative. If consumers are getting a slightly better price at the pump at Costco, they may be willing to come into the store, but overall, a higher price at the pump is likely an overhang on consumers in general.

SPEAKER_1 (4:12)

Sure, and obviously, that feeds into gross margin pressures. So obviously, many are looking out for how Costco is defending it against, you know, some of the macro challenges as well. Melissa, we've got to wrap things up there. Safe travels. We'll see you soon. Melissa Otto, head of Visible Alpha Research, a global market S&P, I should say, global market intelligence. Thank you so much. Let's trade it now with Tom White, host of Fast Market.

Just looking at the chart here, I mean, obviously, we're down today. Looking year to date, what are we looking at percentage-wise? We're up about 5%, so not too bad. Just walk us through an example trade.

SPEAKER_3 (4:49)

Yeah, not too bad, Sam, but that's because we rallied into all-time highs just over a couple months ago, and the stock's pulled back pretty significantly, about 17% from those levels. And we've seen some of this bifurcation in the retail space here. Now, comparable same-source sales, they released those on a monthly basis. So you get some clarity there, implied volatility levels never really elevated in a name like Costco, because we get that data on a month-to-month basis, so you can kind of look into the future a little bit as far as their quarterly numbers are going to go. But the key is, the last couple of quarters we've seen deceleration as far as comparable same-source sales growth. They're still positive, they're still some of the best in the industry, but they're on a trajectory down, and you've seen the stock react that way on that pullback from those recent all-time highs. So I looked at this from the perspective that, hey, if we get that data and implied volatility levels and the near-term options are elevated, maybe there's not going to be much movement. So I looked at an option strategy. This is still a high-price stock, right?