Investors have high expectations from this costco wholesale (COST -1.49%) stock ahead of the company’s upcoming earnings report. With returns of more than 20% so far in 2023, the warehouse retailing giant is outpacing the broader market rally through mid-September.
These profit levels are typically associated with a bull market, which could accelerate if the US economy manages to avoid a recession in the next few quarters. But Costco is an attractive investment partly because of its ability to grow earnings through a wide range of sales environments.
With that competitive advantage in mind, let’s look at three reasons to like this stock as Costco prepares to end its fiscal year on September 26.
1. Costco handles potentially high traffic
Costco sells both consumer staple products and discretionary items such as jewelry and home appliances. This diversity sets it apart from its peers wal-mart (WMT -0.37%) and Target (TGT -1.38%), who focus more on one topic or the other. For example, Target’s sales have declined in recent quarters as shoppers have shifted their spending away from items like home decor.
Costco also felt troubled by this development but has continued to grow its business. Comparable-store sales in August rose 4% overall and 3% in the core U.S. market.
Costco’s late September earnings announcement will add context to this point as will customer traffic trends for fiscal Q4. See continued solid gains here, given that traffic was up a good 4% last quarter. For context, chief rival Walmart reported 3% traffic growth for the fiscal second quarter.
2. Costco may raise fees soon
Costco gets most of its earnings from a steady flow of membership fees, and there are several reasons why this sales approach benefits shareholders. There is very little volatility regarding profits, as they are not overly dependent on stable sales trends. The chain likely won’t report a decline in margins due to the shift toward more consumer essential products.
Cost Operating Margin (TTM) data by YCharts
Yet Costco is also about to increase its annual membership cost since it’s been more than five years since the last increase. This boost would be an immediate blow to its finances and potentially its share price.
But investors shouldn’t expect to see a jump in earnings. Costco executives have made it clear that they intend to spend all the extra cash on increasing the retailer’s pricing advantage. This is the right call for long-term growth because it helps ensure that Costco continues to win market share from peers that don’t benefit from its scale and cost advantages.
3. Costco is posting record renewal rates
The main metric I’ll be watching in Costco’s end-September earnings report is the chain’s renewal rate. The core growth figure has remained steady at a record high of more than 90% in recent months. Similar strong results this quarter will confirm that shoppers remain highly engaged despite changes in their spending habits. This would be more proof that Costco has room to raise its membership fees as well. And this will mean increasing market share through today’s challenging sales environment.
Costco stock rarely looks cheap, and the current price is no exception. Investors pay about 1x annual sales for the retailer’s shares, while Walmart pays 0.7x sales. However, given Costco’s more stable earnings and its strong track record for growing sales, this premium is justified, whether consumers are focused on value or looking to spend money during cyclical ups and downs.
There is no telling when the next sustained uptrend in the market will occur. But whatever retailing environment develops in the coming months and years, Costco stock is likely to deliver solid returns.
Source: www.fool.com
