The rise in inflation opens the door to the resurrection of Costco in the market
Selling cheap gas and groceries hasn’t been enough to keep Costco’s shares in the green in the markets in 2022. Investors may consider buying its shares, some experts say.
Costco shares have fallen 19% during 2022, to a recent $462, on concerns about a buildup of inventories and a pullback in discretionary spending. The company appeared to confirm those concerns on November 30, when the Issaquah-based company reported comparable sales growth of 4.3% for the four weeks ending November 27, up from 6% the previous month.
Costco’s fiscal first-quarter earnings, reported Dec. 8, didn’t help, despite strong subscriber renewals and strong revenue from its cult-favorite private label products. At a time when people should have been flocking to Costco stores for bargains, rising prices and tight budgets took their toll.
However, a disappointing quarter should not cloud the company’s strength. Annual profits are growing in double digits and subscription renewal rates hovered around all-time highs of more than 90% in the last quarter. With inflation still a problem, Costco should continue to attract customers, even wealthy ones, who are looking to save. At least, that is what some analysts predict. “People just want bargains, and Costco gives them that,” says Louis Navellier, founder and chief investment officer of Navellier & Associates.
When Navellier last visited Costco, he says, the store was full of luxury SUVs “loaded with stuff.” The company’s comparable sales, he adds, were “good enough for any retail chain.” Investor concerns about Costco are understandable, given that inflation, rising interest rates and weakening economic conditions have been downbeat for most companies in the industry. “Trees don’t grow to the sky and sales won’t always surprise on the upside,” writes Scott Mushkin, founder of R5 Capital.
Still, Costco’s net profit margin will be less than half a percentage point in the latest quarter from 10.6% a year earlier, excluding subscription fees, while inflation fell slightly. “We’ve seen some impact in non-food discretionary items, but our numbers have been pretty good relative to overall retail,” said Richard Galanti, the company’s chief financial officer. “We run our business for the long term and feel good about our opportunities even if nothing goes in a straight line,” he added.
Against all odds
Founded in 1976, Costco has become one of the greatest retail success stories in history. “Costco is able to zigzag because it mainly sells things that customers need at unbeatable prices,” says John San Marco, manager of the Neuberger Berman Next Generation Connected Consumer (NBCC) fund. That formula, he says, has been “a good recipe regardless of the macro context.”
Consensus expects sales to rise more than 6% in 2023
It’s worked over time: The stock rose more than 1,200% from March 2009 to December 1, 2022, eclipsing Walmart’s 223% return in the same period and contributing a 504% gain for the S&P 500. It also worked during the Covid pandemic. Demand for household necessities boosted Costco’s sales an average of 17% in each of its past two years. Consensus expects sales to rise more than 6% in 2023 and 2024, to $240 billion and $260 billion, respectively.
Costco’s profit growth is the envy of many retail rivals. Earnings per share are projected to rise nearly 10% in 2023 to a record $14.42 and 11% in 2024 to $15.97. The company pays a dividend of $3.60 per share, yielding 0.8%.
Costco’s subscription fees have been a steady source of revenue, most of which flows into the bottom line. It looks like some fees are due to increase in early 2023. The company’s lowest cost annual fee is $60. Cowen analyst Oliver Chen