Beat profits in the cards for Costco’s stash?


[Note: Costco’s fiscal year ends in August]

Costco (NASDAQ: COST) will report its fiscal fourth quarter results on Thursday, September 22. We expect Costco to likely exceed revenue and earnings expectations, driven by growth in comparable sales. Costco reports monthly sales updates, meaning investors already know how Costco has dealt with inflation, supply chain issues, and other macroeconomic factors. The warehouse club operator has held its own as a retail chain, still posting double-digit net sales growth of 15% year-over-year (yoy) in the fourth quarter – despite mounting global economic challenges. In addition, the company’s fourth-quarter comparable store sales were up 10% yoy, excluding the effects of changes in gasoline and foreign exchange. That said, Costco has delivered an impressive performance over the past two years, one that illustrates how resilient its business model is, even in tough economic times. It should also be noted that the monthly reports do not include information about Costco’s profitability or the breakup of segment and membership revenues.

Our forecast indicates Costco’s valuation is $509 per share, which is nearly in line with the current market price. View our interactive dashboard analysis on Costco’s Profit Example: What to expect in fiscal Q4? for more details.

(1) Earnings expected to be slightly above consensus estimates

Trefis estimates COST revenues in FQ4 2022 to be $72.5 billion, slightly higher than the consensus estimate. Costco reported comparable store sales increase of 11% (ex-fuel) and sales grew 16% yoy to $51.6 billion in FQ3 (quarter ended May 8). Prices at Costco are rock bottom and the membership-based model drives high volumes. The retailer saw higher sales at the start of the pandemic due to stockpiling, and now sales are picking up as customers try to fight inflation. In fact, Costco has seen sales rise faster than normal since the start of the pandemic. Compared to third-quarter revenue growth of 16.3%, the company’s revenue grew at a compound annual growth rate of 8.2% over the past decade.

As costs rise in many areas, such as finished products, raw materials, and freight, Costco makes an effort to keep prices low. Because of its size and volume, it can make deals with suppliers to absorb some of the increase, and it also absorbs some itself. For the full year 2022, we expect Costco’s revenue to grow 13% yoy to $221 billion.

(2) EPS likely slightly above consensus estimates

COST’s earnings per share in FQ4 2022 are expected to be $4.30 per Trefis analysis, slightly ahead of the consensus estimate. In the third quarter, Costco’s earnings per share rose from $2.75 last year to $3.04 this year, despite supply chain pressures and a pre-tax tax linked to higher wages. Costco’s gross margin, however, fell from 11.18% last year to 10.19% this year.

An increase in membership fees this year is unlikely due to high inflation, but it will happen sooner rather than later. Costco generally increases its membership fees every five years, most recently increased in 2017. This should help the company further boost its bottom line.

(3) Estimation of the share price corresponding to the current market price

Judging by our Costco valuation, with an EPS estimate of approximately $13.25 and a P/E multiple of 38.4x in fiscal 2022, this translates to a price of $509, which is in line with the current market price. Costco’s ability to consistently drive higher sales and turn them into profits has impressed investors, leading to a higher P/E compared to its competitors even before the pandemic, when it hovered around 30x.

It’s helpful to see how his peers are doing. COST Peers shows how Costco’s stock compares to peers in terms of metrics that matter. Other useful comparisons for companies in different sectors can be found at Peer Comparisons.

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