Will This Warehouse Club’s Cost-Cutting Strategy Doom Tomorrow’s Earnings Report?

Costco (COST), one of America’s most beloved warehouse clubs, is set to report its fiscal 2015 fourth quarter results tomorrow. Wall Street Analysts are expecting an EPS of $1.66 and revenue of $36.28 billion. The Estimize consensus is calling for an EPS of $1.68 and revenue of $36.52 billion.

Should the Comparable Sales Figures be concerning?

Earlier in September, Costco released its same store sales results. Due to the strength of the US dollar, the value of foreign sales reflected a decline and overall comparable store sales fell by 1% from last year. Furthermore, decreasing gasoline prices led to a fall in gasoline sales.

Is the Business Model sustainable?

One excellent aspect of Costco’s business is its devotion to members. To fight off Target and Wal-Mart, cost cutting has become an integral part of the Costco business model. To keep members interested in coming back, the company is able to cut prices on merchandise and skillfully entices consumers into buying larger quantities. With the employment of this strategy, the warehouse giant boasts a 90% member retention rate.

However, from an investor’s perspective, a continual price slashing strategy may be worrisome. But, when taking a further dive into the logistics of Costco’s model, revenues from membership increased to $2.4 billion last year, up 6% from 2013. In addition, in 2009, Costco’s total cardholders count was 31 million, rising to 42 million by 2014. According to these statistics, it seems fair to say that the member acquisition and retention strategy is working quite well due to the competitive pricing offered in clubs across the globe.

COST data by YCharts

American Express and Competition

American Express was recently dropped as the exclusive credit card accepted at Costco due to the high transaction fees. Of course Costco understood the perks in accepting only American Express credit cards, like wealthier consumers and increased spending, but ultimately, the Washington based company grew tired of paying the higher fees. As a result, Costco struck a deal with Visa and Citigroup. This new deal will cut credit card fees close to zero and the savings will not be minuscule by any means.