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Costco (COST) Attracts Bargain Hunters Amid Tighter Budgets

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Inflationary pressure across a range of products is pinching consumers' pockets, who are flocking to discount stores to cope with the same. The strategy to sell products at discounted prices has helped industry players, such as Costco Wholesale Corporation (COST - Free Report) , draw customers seeking value and convenience amid rising prices.

The consumer price index rose to 8.3% in August 2022 on a year-over-year basis, more than analysts’ expectations of 8.1%. The Fed’s aggressive rate hikes to tame inflation and cool off the overheated economy are making things tough for consumers by squeezing disposable income. Under the current circumstances, people in low-to-middle-income groups have been exhibiting a preference for discount stores.

Striking the 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 an emphasis on memberships have helped Costco post consistent sales growth.

Net sales increased 11.4% to $17.55 billion for the retail month of August from $15.75 billion last year. This followed an increase of 10.8% in July and 20.4% in June. Comparable sales for August jumped 10.1%, following increases of 10% and 18.1% in July and June, respectively.

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


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Steadily Adopting the Omnichannel Mantra

Costco is gradually adopting the omnichannel 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. These services allow 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 United Kingdom, Mexico, Korea, Taiwan, Japan and Australia. We note that comparable e-commerce sales rose 3.9% in August. This followed increases of 10.2% and 7% in July and June, respectively.

Enhancing Footprint

Costco’s expansion strategy looks impressive. The company remains committed to opening new clubs in the domestic and international markets. Its 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 an improvement in membership fees as new warehouse openings ramp up. Membership fees increased 9.2% to $984 million in the third quarter of fiscal 2022.

Marching Ahead of the Industry

In the past year, shares of Costco have appreciated about 9.6% against the industry’s decline of 4.9%. With a long-term earnings growth rate of 9.2% and a VGM Score of B, this Zacks Rank #3 (Hold) company has ample scope to attain new highs.

Additionally, the Zacks Consensus Estimate for Costco’s current financial-year sales and EPS suggests growth of 15.7% and 18.1%, respectively, from the year-ago reported numbers.

3 Stocks Looking Red Hot

Here we have highlighted three better-ranked stocks, namely Dillard's (DDS - Free Report) , Ulta Beauty (ULTA - Free Report) and Arhaus (ARHS - Free Report) .

Dillard's, which operates retail department stores, sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of nearly 215%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Dillard's current financial-year sales suggests growth of nearly 4.8% from the year-ago period.

Ulta Beauty, which operates as a retailer of beauty products, sports a Zacks Rank #1. Ulta Beauty has a trailing four-quarter earnings surprise of 32.8%, on average. ULTA has an expected EPS growth rate of 11.9% for three to five years.

The Zacks Consensus Estimate for Ulta Beauty’s current financial-year sales suggests growth of 13.7% from the year-ago reported number.

Arhaus, which operates as a lifestyle brand and a premium retailer, currently carries a Zacks Rank #2 (Buy). ARHS has an expected EPS growth rate of 14.3% for three to five years.

The Zacks Consensus Estimate for Arhaus’ current financial-year revenues and EPS suggests growth of 49.2% and 5.8%, respectively, from the year-ago reported figures. ARHS has a trailing four-quarter earnings surprise of 92%, on average.

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