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Costco (COST) Stock Presents Enough Reasons to Stay Invested

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There is not much clue, as of now, as to how the stock market is going to behave in the second half of 2022. Risk appetite has almost dried up as investors are walking a tight rope. The Russia-Ukraine conflict, supply chain bottlenecks and soaring inflation are all to blame. Amid such a scenario, you need to stay invested in stocks that may fetch higher returns. We present you with one such stock, Costco Wholesale Corporation (COST - Free Report) that looks well-poised, given its sound fundamentals and growth efforts.

Marching Ahead of Industry

Costco, an “all-weather” stock, has withstood multiple market gyrations and delivered returns to investors. A resilient business model enables it to gain market share and generate profits. This operator of membership warehouses has exhibited a decent run on the bourses and has outpaced the industry in the past year. In the said period, shares of this Zacks Rank #3 (Hold) company have appreciated about 24.1% against the industry’s decline of 3%.

With a long-term earnings growth rate of 9.2% and a VGM Score of A, Costco has ample scope to attain new highs. Additionally, the Zacks Consensus Estimate for Costco’s current financial-year sales and EPS suggests growth of 14.8% and 17.9%, respectively, from the year-ago reported numbers.

Striking Right Chord With Consumers

Costco continues to be one of the dominant warehouse retailers based on the expanse and quality of merchandise offered. A customer-centric approach, strategic pricing, merchandise initiatives and emphasis on memberships have helped Costco to post consistent sales growth.

Net sales increased 20.4% to $22.78 billion for the retail month of June from $18.92 billion last year. This followed an increase of 16.9% in May and 13.9% in April. Comparable sales for the month of June jumped 18.1%, following increases of 15.5% and 12.6% in May and April, respectively.

Clearly, Costco has emerged as a viable option for bargain hunters looking for essentials and other discretionary purchases amid soaring inflation. We believe a growing customer base and high renewal rates should fuel sales.

 

Zacks Investment Research
Image Source: Zacks Investment Research

Steadily Adopting the Omni-Channel Mantra

Costco is gradually adopting the omni-channel mantra to provide a seamless shopping experience. To drive its online sales, the company launched grocery delivery services in collaboration with Uber Technologies in July 2021. This allows members to get their on-demand groceries delivered within hours through Uber and Uber Eats mobile apps.

Also, Costco’s acquisition of Innovel Solutions, a leading provider of third-party end-to-end logistics solutions — now called Costco Logistics, has boosted its e-commerce capabilities and enabled it to sell "big and bulky" items.

The company has been gradually expanding its e-commerce capabilities in the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia. We note that comparable e-commerce sales rose 7% in June. This followed increases of 6.3% and 5.7% in May and April, respectively.

Enhancing Footprint

Costco’s expansion strategy looks pretty impressive. The company remains committed to opening new clubs in the domestic and international markets. In our view, the company’s diversification strategy is a natural hedge against risks that may arise in specific markets. After opening 13 and 20 net new warehouses in fiscal 2020 and 2021, respectively, the company plans to open 24 net new units in fiscal 2022.

We foresee improvement in membership fees as new warehouse openings ramp up. Membership fees had increased 9.2% to $984 million in the third quarter of fiscal 2022.

Enough Liquidity

Costco’s sturdy balance sheet equips it to deal with cyclical downturns and tap growth opportunities. Solid cash flow generation allows it to raise dividends consistently. The company’s cash & cash equivalents (including short-term investments of $638 million) were $11,831 million at the end of third-quarter fiscal 2022.

Costco has always been a favorite pick for investors who are seeking both steady income and growth. This Issaquah, WA-based company, with a strong history of dividend payments as well as sound fundamentals, provides a hedge against any odd swings in the stock market.

3 Stocks Looking Red Hot

Here we highlight three better-ranked stocks, namely, Dollar Tree (DLTR - Free Report) , Boot Barn Holdings (BOOT - Free Report) and Kroger (KR - Free Report) .

The discount retailer Dollar Tree currently sports a Zacks Rank #1 (Strong Buy). DLTR has an expected EPS growth rate of 15.5% for three-five years. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Dollar Tree’s current financial-year sales and EPS suggests growth of 6.7% and 40.5%, respectively, from the corresponding year-ago period’s levels. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average.

Boot Barn Holdings, a lifestyle retailer of western and work-related footwear, apparel and accessories, has a Zacks Rank #2 (Buy). BOOT has an expected EPS growth rate of 20% for three-five years.

The Zacks Consensus Estimate for Boot Barn Holdings’ current financial year sales and EPS suggests growth of 17% and 4.4%, respectively, from the year-ago period.

Kroger, the renowned grocery retailer, carries a Zacks Rank #2 at present. The company has an expected EPS growth rate of 11.3% for three-five years.

The Zacks Consensus Estimate for Kroger’s current financial-year sales and EPS suggests growth of 6.7% and 6.3%, respectively, from the year-ago reported number. KR has a trailing four-quarter earnings surprise of 20.3%, on average.