Financial Report Outlook | As American consumer confidence wanes, can Costco (COST.US) performance release positive signals?

Costco, the membership-based warehouse retail giant, plans to announce its second-quarter financial results for the fiscal year 2025 after the market closes on March 6th. With a successful membership model and pricing advantage, this warehouse giant that covers all customer groups in the U.S. has exceeded market expectations for net profit for six consecutive quarters. Expected data shows that Wall Street analysts generally expect earnings per share for the second fiscal quarter ending in February to increase by 5% to $4.10, with total revenue expected to increase by 7.8% to $63.02 billion. As recent economic data shows weak consumer spending, extremely low consumer confidence, and a significant increase in inflation expectations in the United States, market concerns about "stagflation" have intensified. Investors are eagerly anticipating positive performance data from Costco, a retail giant, to boost investor sentiment and confidence in the future of the U.S. economy. Each financial report of a U.S. retail company tells two stories: the company's own narrative and the overall picture of the U.S. economy. The three major retailers, Costco, Abercrombie & Fitch, and Target Corporation, who are set to announce their earnings this week, will provide dual interpretations. Costco has been a market winner for decades, but the company's management indicated during their December earnings call that "members are becoming increasingly cautious in their spending decisions," a trend that recent U.S. economic data suggests is ongoing. The late board member Charlie Munger once called Costco an "almost perfect company," but lamented that its stock price was too high - currently trading at a P/E ratio of 60. The fervent pursuit of its members and investors, the minimalist aesthetics of its warehouse stores, and the weekend parking lot crowding have long been cultural symbols. Why are the financial data of U.S. retail giants like Costco, Walmart Inc., and Target Corporation so important? The main logic is that this data may provide more crucial clues to the significant underperformance of the U.S. economy and the sluggish consumer spending trends seen this year, either exacerbating market worries about so-called "stagflation" or easing market anxiety. The PCE data report released by the U.S. Bureau of Economic Analysis on Friday showed that the core PCE index in January rose by 2.6% year-on-year, in line with market expectations, marking the smallest annual increase since early 2021. Additionally, the core PCE year-on-year growth in December was revised from 2.8% to 2.9%, showing a slight moderation in the U.S. core PCE index on a year-on-year basis. The unfavorable news from the PCE report for the U.S. economy is that, adjusted for inflation, consumer spending unexpectedly fell by 0.5% month-on-month, marking the largest monthly decline in nearly four years. Economists had expected a flat or slight decline of 0.1% month-on-month. Before the PCE data report showed a cooling in consumer spending, there was already an increase in pessimism about "stagflation" in recent times. Both January CPI and PPI exceeded expectations, and long-term inflation expectations for American consumers have risen to levels not seen in almost 30 years. The latest inflation expectations from the University of Michigan for February show that the final value of consumer expectations for inflation over the 5-10 year period was 3.5%, the largest monthly increase since May 2021 and the highest since 1995. American consumers are increasingly concerned that Trump's tariff hikes will lead to price increases. The U.S. composite PMI fell from 52.7 in January to 50.4, hitting a new low in 17 months. The more pessimistic data is that the significant contraction of the vital service sector activity for the U.S. economy has shrunk for the first time in over two years, with the initial Service PMI at 49.7, entering the contraction zone, significantly lower than January's 52.9, unexpectedly reaching a new low since January 2023. The latest consumer confidence expectations index released by the Conference Board in the U.S. fell below 80 (typically indicating an economic recession), largely due to concerns that Trump's tax policies will lead to significant price increases. The latest data from the Conference Board also shows that consumer confidence in February fell for the third consecutive month, decreasing by 7 points to 98.3 from January's 105.3, lower than the market's consensus of 102.3, the lowest since June 2024 and the largest monthly decline since August 2021. However, as evidenced by the recent inversion of the U.S. yield curve, such signals are not guaranteed to come true, but they are central to the recent sharp rise in expectations of "stagflation" in the U.S. economy. Gregory Daco, chief economist at EY-Parthenon, said, "There is a smell of stagflation in the air. Even though we haven't reached that point yet."He pointed out, "Developments, especially those of the past week, suggest that consumer sentiment and spending are softening, and concerns about inflation - at least inflation expectations - are rising." Costco's stock price hit a record high in mid-February, and despite a slight pullback recently, it regained momentum before its financial report. The stock has surged by 38% in the past 12 months and has maintained a steady upward trend since the beginning of the year. Its position as the "king of value investment" has been difficult to shake for investors. During the first-quarter conference call for the fiscal year 2025, management revealed that categories such as jewelry, gift cards, home goods, and sports equipment saw a double-digit increase, while the cold storage and frozen foods division in the food and grocery department led to single-digit growth in same-store sales. The company successfully introduced new brands such as Peloton and Wrangler that quarter. Costco achieves significant cost advantages through high turnover and high sales volume, maintaining lower gross margins with a low-price strategy. Simultaneously, its high membership renewal rate of 92% brings stable annual fee revenue, forming a virtuous cycle of sales performance and profit growth. The Q1 data for 2025 showed an overall revenue increase of 7.6% to $62 billion, and net profit rose from $1.59 billion to $1.8 billion, with earnings per share reaching $4.00.4 dollars.After experiencing a steady increase in stock prices for several months, Costco's stock price broke through the historic $1000 mark two weeks ago. The financial market is closely watching whether this US retail giant with a market value of $460 billion can continue to deliver better-than-expected performance with its unique business model in the face of consumers facing persistent inflation and high interest rates leading to severe softening demand. This will also release positive signals that American consumer spending still remains resilient. With President Trump announcing that tariffs will be imposed on China, Mexico, and Canada starting this week, American consumers are increasingly worried that the tariff hikes may lead to price increases and even fear that companies may lay off employees significantly due to inflation and high interest rates from the Federal Reserve, which may in turn lead to predictions of substantial cuts in consumer spending. Consumer spending has been a core drive of the US economy's continued strength since the Federal Reserve's aggressive rate hikes cycle in 2022. Due to recent economic data showing weakness in the US economy, the GDPNow model from the Atlanta Federal Reserve updated its data on Friday, sharply lowering the US Q1 GDP annualized quarterly rate from growth of 2.3% to -1.5%.