As an ultra-popular membership-only big-box retailer, Costco (NASDAQ:COST) inherently commands broad business relevancies. At the same time, all investors need to pay attention to the company, irrespective of their interest in its trajectory. That’s because executives at the firm sounded the alarm about shifting consumer behaviors that signal recession risk. Nonetheless, I am bullish on COST stock.
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A Robust Jobs Report Doesn’t Represent the Whole Story
Late last week, Wall Street responded positively to the mostly encouraging implications behind the May jobs report. As TipRanks reported, the economy added 339,000 new employment opportunities last month, well ahead of the forecast of 190,000. It also eclipsed the 253,000 jobs added in April. Still, the strong print doesn’t tell the whole story.
For instance, the unemployment rate increased slightly to 3.7%, though it’s still a low figure relative to the pandemic highs. More conspicuously, average hourly earnings increased by 0.3% for all workers to $33.44. Over the past one-year period, average hourly earnings jumped 4.3%. However, these stats represent a dip from 0.4% and 4.4%, respectively, in April.
In addition, CNN noted that “the number of people unemployed for 15 to 26 weeks jumped by 179,000 to 858,000.” In other words, people who are seeking employment may be taking longer to do so. When considering the mass layoffs that materialized since last year, investors shouldn’t automatically assume a recovery is in progress.
“As employment reports go, this one was more of a mixed bag,” Bankrate’s senior economic analyst Mark Hamrick stated in a research note.
COST Stock Adds Wrinkle to Recession Concerns
To be fair, small ripples within an otherwise strong jobs report might not seem a reason to panic. And for clarity, no reputable analyst proposes panicking as an effective response. Nevertheless, deep economic fissures usually originate as almost-imperceptible blemishes. Moreover, the underlying narrative of COST stock suggests that investors should monitor consumer behaviors closely.
In a call with a news publication, Costco chief financial officer Richard Galanti stated that he witnessed some customers trading down from beef purchases to less-pricier alternatives such as pork and chicken. Adding to wider concerns, Galanti remarked that, historically, such trade-down behaviors aligned with incoming recessions.
What’s more, Costco’s CFO stated that other customers have begun purchasing canned meat and fish products, which also represent lower-cost alternatives to beef. As well, these products feature a much longer shelf life.
Notably, Galanti reasoned that shoppers who purchase non-perishable (or otherwise long-lasting) products will be able to stretch their dollars. It’s an argument that suits COST stock since big-box retailers incentivize bulk purchases. If consumers anticipate higher prices – which a hotter-than-expected jobs report may reasonably spark – then buying in bulk allows them to mitigate rising inflation.
Nevertheless, investors should keep close tabs on COST stock. Inherently, because the underlying retailer operates a membership-only business, Costco customers tend to be more well-off than those who shop at Walmart (NYSE:WMT).
Without casting aspersions on Walmart, if executives there saw customers trading down from pricier protein to cheaper counterparts, the pivot wouldn’t be surprising. The average Walmart shopper is about 59 years old and earns $80,000 a year.
In contrast, the average Costco member is a 39-year-old woman who earns $125,000 a year. Therefore, if this demographic feels the need to trade down, that’s a possible conundrum.
Costco Itself Appears a Relatively Reasonable Wager
While COST stock may symbolize an economic warning, as an investment, it also presents challenges. For example, in its latest quarter ended May 2023, the retailer posted revenue of $53.65 billion. This stat came in just under 2% higher on a year-over-year basis. However, analysts anticipated revenue of $54.57 billion.
On the bottom line, the company posted earnings per share of $2.93, missing Wall Street’s target of $3.29. Management noted that shoppers pulled back on discretionary purchases due to elevated consumer prices and broader uncertainties.
There are two takeaways here. Obviously, an earnings miss isn’t ideal. Additionally, investors should take note that even higher-income consumers are feeling the heat. That said, for COST stock specifically, it’s one of the more insulated market ideas. In other words, a downcycle may hurt Costco, but other enterprises that address more financially vulnerable customers will likely absorb far greater pain.
Is COST Stock a Buy, According to Analysts?
Turning to Wall Street, COST stock has a Moderate Buy consensus rating based on 18 Buys, seven Holds, and zero Sell ratings. The average COST stock price target is $543.59, implying 6.3% upside potential.
The Takeaway: Use COST Stock as a Benchmark
Fundamentally, the point in this narrative isn’t so much about buying or selling COST stock. Rather, it’s using the Costco members’ shifting behaviors to guide other investment decisions. Essentially, with gainfully employed individuals trading down their purchases, market participants should be careful about being too optimistic.
