Costco earnings: What to expect on consumer spending, profits

Yahoo Finance's Brian Sozzi previews expectations for Costco earnings.

Video transcript

[AUDIO LOGO]

JULIE HYMAN: Retail giant Costco, also known as Yahoo Finance's Company of the Year, it's reporting earnings tomorrow after the close. And Sozz has got his hot take on what to expect.

BRIAN SOZZI: Yeah, I'm really beating into the ground, this Yahoo Finance Company of the Year. As we should because it's Costco and it's very exciting. So the company is reporting earnings after the close tomorrow.

A couple of things I am watching ahead of these results. And there is my trusty list. First, sales trends in more expensive discretionary products. Costco, I think, has acknowledged that they have seen a little bit of a slowdown. Those--

JULIE HYMAN: Giant teddy bears?

BRIAN SOZZI: Not giant teddy bears.

JULIE HYMAN: Big bottles of wine?

BRIAN SOZZI: Julie, no, no, no, no, TVs and jewelry. Those big 93-inch plush bears are, in fact, still selling, Julie.

JULIE HYMAN: [LAUGHS]

BRIAN SOZZI: Next up, profit margins with inflation coming off its peak. Gross profit margins, I should say, more specifically. Watch to see how those pan out with inflation coming down a little bit, notably in food.

And then hints at a membership fee increase. You better believe that CFO Richard Galanti is going to be fielding at least two or three analyst questions on this earnings call about a membership fee increase at some point next year.

They have held the line, even as Sam's Club has raised membership fees. But if Costco does raise fees, it could be a big boost next year.

Now, speaking of Galante, I caught up with him in a new store opening, as part of our Company of the Year coverage. Take a listen to what he said ahead of these earnings reports.

RICHARD GALANTI: Look, my answer is it rains on everyone. Maybe it drizzles on us, and not hard rain. And so we've done a little better than our peers. This was a slight downtick in those numbers.

And as one of the analysts said, in some ways we're priced to perfection. We sell at a very attractive multiple. We're doing well.

BRIAN SOZZI: And Galante explaining those-- the market reaction to November sales that were reported on November 30. And the market really hammered Costco shares because same-store sales slowed month-over-month.

It was good month, relatively speaking versus retail. But as Galante noted correctly, Costco's stock is priced for absolute perfection. Meaning sales, theoretically, should have accelerated and they didn't.

Now, Costco shares, so far, month-to-date, are down about 11% in large part because of that miss. Citi noting this morning in a note, that Costco remains one of their most crowded retail trades.

So it will be interesting to see that market reaction to that report.

My take overall is this. And really, no matter the quarter, no matter how it shakes out, Costco is, in fact, very deserving of our Company of the Year award in my humble view. There I am holding that legendary dog, which Costco held the line on that price for $1.50. And the refill-- the unlimited refill soda that goes along with that dog.

This company has been operating at a very high level during a very challenging year for most part of the year. So double-digit same-store sales increases.

BRAD SMITH: Yeah, gonna be a big quarter to track for them. Of course, we already get some of those numbers out on a more regular cadence, fortunately. But I think for how they're engaging with the consumer right now and consumer that's looking for better optional pricing at a per unit basis, too.

BRIAN SOZZI: Darn good hot dog.

BRAD SMITH: And what about--

JULIE HYMAN: Is it beef or pork?

BRIAN SOZZI: Well, I didn't include that in my piece, Julie.

JULIE HYMAN: We don't know? We don't know the answer to this?

BRIAN SOZZI: Maybe it's a mix. Is it a mix?

JULIE HYMAN: No, no, no, no. It's either beef or it's pork.

BRIAN SOZZI: All I know, it's giant-- it's a giant hot dog. It's $1.50. It tastes good. And it came with a free-- it came with a refillable soda.

JULIE HYMAN: I'm just saying there are certain segments-- well, I guess if you're a vegetarian, you're not eating in the first place.

BRIAN SOZZI: It melted in my mouth. It was great. It had little sesame seeds on that bun. It was great.

JULIE HYMAN: I don't know that I want a--

BRIAN SOZZI: No, it was great.

JULIE HYMAN: --hot dog to melt in--

BRIAN SOZZI: It was just--

JULIE HYMAN: --my mouth.

BRIAN SOZZI: --an amazing experience.

JULIE HYMAN: That's not the--

BRAD SMITH: That's a space hot dog.

JULIE HYMAN: --describer that I would use for--

BRIAN SOZZI: Listen, I mean--

JULIE HYMAN: --a good--

BRIAN SOZZI: There's only so much--

JULIE HYMAN: --hot--

BRIAN SOZZI: --you can report on.

JULIE HYMAN: --dog.

BRIAN SOZZI: This is our Company of the Year.

JULIE HYMAN: You want it to be toothsome.

BRIAN SOZZI: The hot dog is good. It was so good. It had a nice little crisp. It just melted. It was great.