Is Costco Wholesale Corp's Stock a Buy Ahead of Its Q4 Earnings Report Tomorrow?

Costco (Nasdaq: COST) has been a paragon of consistency in the retail industry throughout its history, and it's established a wide economic moat thanks to its business model and track record of customer satisfaction.

Costco will put that reputation on the line when it reports third-quarter earnings on Thursday after-hours.

Analysts are expecting revenue at the retail giant to grow 10.2% to $69.6 billion and for generally accepted accounting principles (GAAP) earnings per share to improve from $4.28 to $4.92.

Is Costco a buy ahead of earnings? Let's take a closer look at what to expect.

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The consumer is under pressure

Costco's report comes the week after we heard from two of its closest competitors. Walmart and Target both reported earnings last week, and while they delivered solid results, they expressed cautiousness about the remainder of the year, noting that the consumer is facing pressure from inflation, including high gas prices, and a weak labor market.

Both companies also noted the benefit from increased tax refunds in the quarter, which could help Costco as well.

Costco is less sensitive to the macroeconomic environment because of its membership model. It makes most of its profit from membership fees, and its membership model means that its customers are higher-income than those of the typical retailer.

What to watch in Costco's quarterly report

Costco reports comparable sales growth every month so its quarterly report is less of a surprise than it is for its peers. In the four weeks ending May 3, comparable sales adjusted for gas prices and foreign exchange rose 7.8%, an improvement over the 6.5% growth in the first 35 weeks.

High gas prices tend to pinch consumer spending, but they can be a good thing for Costco, as cheap gas is part of the appeal of shopping there. In fact, high gas prices tend to encourage its members to visit more often, which could translate into more spending inside the store, and even an increase in members.

This is Costco's first quarterly report since the war in Iran began, so investors should pay attention to any commentary on gas prices.

Is Costco a buy?

Based on results from Walmart and Target, Costco's own comparable sales, and the potential tailwinds from higher gas prices, Costco looks poised to deliver strong third-quarter results. Costco doesn't give guidance, so investors won't get much insight into the current quarter.

While Costco's business remains rock-solid, the stock is still uniquely expensive for a retailer with a price-to-earnings ratio of 52, which is significantly higher than any of its peers.

Costco deserves a premium, but at that price, the upside for the stock seems limited.

Investors considering buying the stock should be patient and capitalize on pullbacks in the stock as they occur. With much of the positive information from the quarter already seemingly priced in, it wouldn't be surprising to see Costco move lower following the update due to concern about its valuation.

Jeremy Bowman has positions in Target. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.