Major retail stocks, including Costco Wholesale (NASDAQ: COST), declined on Tuesday, July 26, after Walmart (WMT) lowered its fiscal second quarter and full-year guidance. Amid soaring inflation, consumers are spending more on essentials, like food, and cutting down their expenditure on discretionary goods. This trend is forcing Walmart to mark down certain discretionary items, thus hurting its profitability. Despite the tough conditions faced by the retail sector, Wall Street analysts continue to be bullish on Costco.
Costco is a membership-only warehouse chain, selling groceries as well as discretionary items through 833 warehouses. The company also operates self-service gasoline stations at a number of its U.S. and international locations.
Costco’s June Sales were Impressive
Earlier this month, Costco reported strong sales for the retail month of June (five weeks ended July 3, 2022). The company’s June sales increased 20.4% to $22.8 billion, with comparable sales up 18.1%. Even after excluding the impact of changes in gasoline price and currency fluctuations, Costco’s June comparable sales were up 13%.
Costco sells its merchandise at lower prices to its members, compared to the prices at which they are sold at other wholesale or retail stores. Due to such bargain deals on a wide range of merchandise categories, Costco enjoys strong membership renewal rates. At the end of the fiscal third quarter (ended May 8, 2022), Costco’s membership renewal rates were 92% in the U.S. and Canada, and 90% worldwide.
Analysts Remain Bullish on Costco
Following a recent visit to Costco headquarters and a tour of the nearby warehouse, Jefferies analyst Corey Tarlowe reaffirmed Costco stock as her top pick.
While Costco might not hike its membership fees amid the ongoing macro challenges, Tarlowe is “encouraged” by the company’s narrative about gas, inventory, international, and in-store productivity initiatives, like self-checkout.
Tarlowe stated that Costco sees its Gas segment as a key traffic driver amid rising fuel prices. It’s worth noting that nearly 50% of members who purchase gas at Costco also buy goods at the warehouse. However, this proportion has declined as “more members have been topping off their gas tanks.”
Also, management is bullish on further expansion of Costco’s international business, as it carries a higher margin than the domestic business due to lower costs and less competition. Costco plans to open 25-30 new warehouses per year, 50% of which will be in international markets.
Recently, Deutsche Bank analyst Krisztina Katai upgraded Costco stock to a Buy from Hold, and increased the price target to $579 from $525. Katai views Costco as one of the most consistent players. The analyst feels that the company’s “steady traffic gains and high membership renewal rates serve as key differentiators in an increasingly uncertain backdrop.”
Overall, Costco scores a Strong Buy consensus rating based on 16 Buys and three Holds. The average Costco price target of $560.21 implies 9.43% upside potential from current levels. Shares are down 9.4% year-to-date.
Conclusion
As evident by the recently reported June sales numbers, Costco continues to see strong top-line growth, with members taking advantage of the lower prices offered by the company amid an inflationary environment. Wall Street analysts continue to be bullish on Costco for multiple reasons, including impressive membership renewal rates.
What’s more, as per TipRanks Smart Score System, Costco scores a nine out of 10, indicating that the stock could likely outperform the broader market.
