isn’t the kind of company that delivers much in the way of bad news and Thursday’s earnings report shouldn’t be any different. Still, investors looking to buy a dip might want to hope for some.
Between its long history of upbeat earnings and robust monthly sales updates—the last of their kind among the major retailers—Costco Wholesale’s (COST) quarterly earnings results typically don’t include many surprises. That’s likely to hold true when the company reports its fiscal fourth quarter after the bell today: We already learned earlier this month that the quarter’s comparable sales were up double digits when it provided its August update.
Yet anything in the report that could cause a wobble in the stock should be welcome for investors who have been held back by its premium valuation. While Costco has dropped 13% this year, that handily beats the
21% fall, and its summer rebound also chugged ahead that of the broader market. Yet the shares, which have always fetched are in no way cheap. They still change hands at more than 34 times forward earnings, a little ahead of their five-year average of 33.
Hence, wishing for bad news. For those who have missed Costco’s multiyear run, or hesitate to add to their position at that price, an opportunity to get the shares a little cheaper would be a treat.
Of course, it’s been a tough month for the market, and Costco is no exception. And a closer look shows the selloff actually has made the shares less pricey at least compared with where they’ve stood over the past year. Costco trades at 0.9 times price to sales and 9.4 times price to book, on a forward basis, both below their median since mid-September 2021. In fact, its median one-year forward earnings multiple has exceeded 38 times. By that measure, bargain hunters may already be intrigued.
Buying on the dip has undoubtedly been a profitable bet in the recent past. Costco has climbed more than 205% in the past five years, almost four times the S&P 500. But what of those who fear that means they’ve missed the boat? There are trends that should give them comfort.
Recent monthly same-store sales figures show that Costco’s comps are still running more than 30% above where they were prepandemic, while traffic and the amount shoppers are spending when they visit have been increasing. That indicates that the market share gains the company seized during the pandemic are likely durable.
Then there’s the fact that “Costco’s membership trends have never been stronger,” as Baird analyst Peter Benedict noted earlier this month—and it could get additional revenue if it were to institute a seemingly timely membership fee increase, though that’s not something that is expected to happen just yet.
The reality is that while high inflation, worries about the economy’s trajectory, and inventory woes are indeed weighing on retail as a whole, Costco sidesteps a lot of those concerns. Its August update showed ongoing resilience in nonfood categories, which suggests it doesn’t have a glut of merchandise that its shoppers are suddenly feeling too strapped to buy, not unexpectedly given its relatively affluent customer base.
Its discounted gas may have helped traffic during the summer price spike, but in fact in all of 2022 through Labor Day, Costco’s traffic has been above prepandemic levels in 31 of the year’s 36 weeks, according to data from Placer.ai.
It’s clear that the company’s low-price strategy is resonating. Or as Jefferies analyst Corey Tarlowe previously told Barron’s, “value retailers like Costco are the best positioned, because …hen people’s pockets are pinched, value wins.”
Investors can too.
Write to Teresa Rivas at [email protected]