Costco Wholesale (COST) stock has been on an incredible run, leaving most other brick-and-mortar retailers in the dust, up 46.4% year-to-date and around 100% from its 2020 bottom.
COVID pressures have not taken a stride out of the big-box retailer’s step. People continue craving the best deals, and the recent bout of inflation (U.S. CPI is now the highest it’s been since 1982) may have actually given the membership-only giant a boost.
Undoubtedly, many customers know they’re getting a great deal with Costco, even as prices across the board begin to rise. Despite the recent run, I am bullish on Costco stock, not only for its ability to dodge and weave through an inflationary environment, but because it may have additional upside once the firm has a chance to ramp up on its digital efforts.
Costco Stock Fairing Well through High Inflation
With unforgiving inflation showing no signs of dying down, the company has shown a willingness to take a bit of a hit to keep its value promise with its members.
Food price inflation, in particular, has been a massive problem for families who refuse to raise their budgets at the grocery aisle. For now, Costco has done a better job of absorbing some costs (think higher shipping prices and labour costs) versus its big-box rivals in the retail space.
As inflation remains persistent, though, Costco will have to raise prices, but likely not to the same extent as its competitors. Indeed, the short-term hit to margins in exchange for winning over membership fees and a whole bunch of loyalty seems like a worthy trade-off.
Resisting the Inflationary Shock
There’s no question that recent price increases have come as a shock to many consumers.
Costco has been a go-to place to resist inflationary shock. The company still has a value proposition that’s tough to top, and it should be able to continue flexing its muscles, even if inflation isn’t as transitory as the U.S. Federal Reserve previously thought.
The key to Costco’s plan on moving through the bout of inflation is to proceed forward with price hikes in a gradual manner. By doing so, Costco can make less-noticeable price increases across a wide range of items. Costco memberships can really pay for themselves, especially in times of unforgiving inflation.
Costco’s navigation through this inflation spike is remarkable, and its brand affinity will get a permanent jolt, even after inflation falls back towards that 2% mark, whenever this may be. Such improved brand affinity should give Costco an even bigger edge once it’s ready to bolster its e-commerce ambitions.
Charlie Munger’s Bullish Costo Comments
Legendary investor Charlie Munger recently stated that he believes Costco will, in due time, evolve into a “huge internet player” that could bring the fight to Amazon (AMZN).
E-commerce is a key area in which Costco could thrive, especially once autonomous capabilities reduce bulk shipping costs considerably. While Munger’s bullish comments are encouraging, they seem a tad far-fetched.
Whether Costco poses a risk to Amazon remains to be seen. For now, though, Costco’s brand image seems to be considerably better than Amazon.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, COST stock comes in as a Strong Buy. Out of 25 analyst ratings, there are 19 Buy recommendations and six Hold recommendations.
The average Costco price target is $556.44. Analyst price targets range from a low of $423 per share to a high of $610 per share.
Disclosure: Joey Frenette owned shares of Amazon at the time of publication.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
