Current COST consensus is for Q2 EPS of $1.28 on total sales +4% to $28.5 bln. February sales will be included in the earnings press release.

Key areas of focus:

  • Comparable Store Sales: COST still provides monthly comps/sales updates and will report February sales with earnings.... The past two months' sales were lighter than anticipated with the impact from weather (Winter storm Jonas) and Superbowl shift cited. Investors will be looking for sales rebound to support this reasoning vs an actual downturn. 
  • Margins (gas deflation has large impact in these figures): COST will break out core merchandise and gas business margins during the earnings conference call. Q1 gross margin was up 26 bps at 11.29% (-6 bps excluding gas deflation). Q1 core merchandising gross margin +24 bps (-3 bps excluding gas deflation). Within the core business -- all four segments (Food/sundries, hardlines, softlines and fresh foods) saw margin expansion. Inflationary pressures and pricing are common topics in Q&A.
  • Other metrics  Average transactions and traffic data are updated during COST monthly sales pre-recorded conference calls (so actual qtrly results have minimal impact). 
  • Membership sign-ups and renewals (important leading indicator--given on conference call) : Recap from last quarter -- Q1 new membership sign-ups company-wide were +7%. Executive Membership (accounts for a third of the members base and more than two-thirds of sales in the countries where it is available) continued to benefit from good sign-ups at existing and new locations, continued increasing penetration and strong renewal rates-- averaging up ~91% in the US/Canada (nearly unchanged from Q4) and 87.8% worldwide (also near Q4 level). There has been speculation that Costco will raise its membership price at the back end of 2016 so this will also be a key topic during the conference call.
  • Expansion (may provide warehouse expansion plan during the conf call): COST FY16 CapEx estimate is $2.8-3 bln vs $2.4 bln prior year. Co operates 691 warehouses, including 488 in US and Puerto Rico, 90 in Canada, 36 in Mexico, 27 in UK, 24 in Japan, 11 in Taiwan, 12 in Korea, 8 in Australia and 2 in Spain. FY16 current plans include opening 32 net new locations. COST said last qtr that the number could come down a little bit based on timing as enter 2H. Assuming able to do open 32 -- 22 of would be in the US, 3 in Canada, 2 in Japan, 2 in Australia, 1 UK, 1 Taiwan and 1 in Spain.
  • Other hot topics: Card changes - American Express (AXP) confirmed about a year ago in February that its US co-brand and merchant acceptance agreements with Costco were set to end on March 31, 2016. COST subsequently confirmed new co-brand credit card program agreement with issuer Citi (C) and an acceptance and co-brand incentive agreement with Visa (V).Additional details were released this week. The company previously said that the transition would take several weeks- existing members with the existing co-branded cards will be getting new cards in the mail on or about the time of the actual transition. Co simply could not communicate to members about the new program until that time.


ETFs: Consumer Staples Select Sector SPDR (XLP) -- COST accounts for ~4%, Retail HOLDRS Trust (RTH) -- COST ~5%, US Consumer Services (IYC) 2.5%, SPDR Retail (XRT) a little over 1%.