While big-box retailer Costco (NASDAQ: COST) always presented a compelling narrative for its economic resilience, its shares cut a choppy figure this year. However, COST stock really incurred a discount when the underlying company posted disappointing sales results for November. Still, under a longer-term framework, the retail giant remains attractive. I am bullish on Costco.
First, let’s get the bad news out of the way. According to TipRanks reporter Vince Condarcuri, COST stock slipped over 6% during the December 1 session. “This can be attributed to monthly sales coming in lower than expected,” wrote Condarcuri. “Indeed, comparable sales in November increased 4.3% compared to the consensus forecast of 7.7%. When adjusting for gas sales and FX swings, sales increased by 5.3%.”
More problematic, some detailed data points indicated that even for Costco’s higher-income shopper base, economic woes began weighing more heavily. “Interestingly, e-commerce sales fell by 10.1%, while non-food items also declined for the first time since April 2020. This indicates that rising food prices are cutting into the discretionary spending budgets of consumers.”
To be sure, Costco will release its next earnings report (for the first quarter of Fiscal Year 2023) on December 7. For earnings per share, analysts will be targeting $3.12. In the year-ago period, Costco posted EPS of $2.97.
Adding to concerns for COST stock, the aforementioned November sales report included Black Friday results. Again, this dynamic suggests that macroeconomic conditions have weighed on consumer sentiment. Further, companies that previously relied cynically on the expanding wealth gap cannot just assume that rich folks will simply absorb higher costs.
As well, with high-profile employers announcing layoffs to well-compensated corporate jobs, Costco’s total addressable market may diminish. Obviously, that’s not great for COST stock. Still, it’s probably too early to give up.
COST Stock May Benefit from Higher Energy Prices
While people shop at Costco for attractive discounts on bulk goods, the company truly became relevant for its fuel services. With gasoline prices skyrocketing earlier this year, Costco offered significant mitigation through its members-only petrol stations. While one trip might not save a gargantuan amount, over time, it could add up to serious money in the pocket.
However, as the Federal Reserve kept pounding on inflation through higher benchmark interest rates and as energy markets adjusted to the initial shock of Russia’s brazen invasion of Ukraine, the gasoline catalyst for COST stock somewhat diminished, as the November sales report demonstrated. Still, this narrative can always change in a hurry.
True, much debate materialized regarding the European Union’s proposal for an oil price cap, which came into effect on December 5. On paper, this might be deflationary for hydrocarbon energy prices, but with supply potentially falling due to production cuts from OPEC+ nations, Americans can end up paying more at the pump regardless.
Further, the U.S. has its own developments that could see petrol prices rise. According to a report by Resume Builder, 90% of companies will require their employees to return to the office at least part of the week in 2023. If so, that could boost vehicle miles traveled – which has been rather soft since the pre-pandemic peak – back to normal levels.
If so, that would add inflationary pressure on gasoline prices, which would then benefit COST stock down the line.
On a final note regarding outside fundamentals, the November jobs report came in much hotter than expected. This implies that for all the rate hikes that the Fed imposed, it couldn’t consistently mitigate rising prices for all goods. Further, as the employment situation improves, this creates a circumstance of more money chasing after fewer goods.
Of course, that’s inflationary, which has always been a positive catalyst for COST stock due to its discounts-via-bulk-purchases business model.
Is COST Stock a Buy?
Turning to Wall Street, COST stock has a Strong Buy consensus rating based on 14 Buys, four Holds, and zero Sells assigned in the past three months. The average COST price target is $551.65, implying 13.89% upside potential.
COST Stock is Supported by Financial Metrics
Beyond the fundamentals, key financial data also boosts the bullish argument for COST stock. In particular, the underlying company benefits from strong income-statement metrics.
For instance, Costco’s three-year revenue growth rate (on a per-share basis) stands at 14%, which ranks better than 85% of the competition. In addition, the book growth rate during the same period pings at 10.4%, above 69% of its peers.
On the bottom line, the company features a net margin of 2.57%. In contrast, the retail sector’s median value is 1.94%, translating to Costco beating 62% of the competition. As well, the big-box retailer’s return on equity hit 30.42%, superior to nearly 89% of the industry. Such a robust ROE reflects an extremely high-quality business.
To top it off, COST stock generates both credibility and trust because of its balance sheet. For one thing, it features a cash-to-debt ratio of 1.22 times, above 70% of its peers. Also, Costco’s Altman Z-Score of 7.32 indicates high stability and a very low risk of bankruptcy.
Although it’s not perfect and it’s certainly not exciting, Costco features rising relevancies. Under these wild circumstances, you can’t ask for much more, making COST stock a buy.
