What To Expect From Costco’s stock?

by Trefis Team
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[Updated: 10/26/21] COST Stock Update

Costco (NASDAQ: COST)  released its Q4 report, wherein revenues came in flat and earnings per share (EPS) came in 4% above the Trefis estimates. The company’s revenues grew a strong 17% year-over-year (y-o-y) to $63 billion, driven by comparable sales growth of 15.5% (excluding the impact of gas and F/X). To break it down further, the company’s comparable sales were up 14.9% in the U.S., 19.5% in Canada, and 15.0% elsewhere. In addition, its e-commerce sales rose 11% during the quarter. In fact, the most striking takeaway from this report was a sequential increase of 0.3 percentage points in its member renewal rate from Q3 2021. The company’s member renewal rate stood at 90.3% in the core U.S. market and 88.7% worldwide. To add to this, Costco saw a 12% growth in membership fee revenues in Q4. That said, Costco collects fees from its members and sells items in bulk at rock-bottom prices while making most of its operating margin from these membership fees. This is despite the fact that these fees account for only 2% of the company’s total revenues. The warehouse club operator is also growing its member base as it saw a 1.6% sequential increase in its paid members to almost 62 million by the end of the quarter. And, we believe that these healthy and rising metrics imply a good momentum heading into the crucial holiday season.

In Q4, Costco’s core merchandise saw gross margin pressure (-0.4 percentage points compared to +0.4 improvement in nine months of fiscal 2021) due to inflation. The company has been trying to delay passing on some price increases to customers. However, improving margins at its ancillary business offset some of this margin pressure. Further, the company saw a stellar 20% increase in its EPS to $3.76 – despite the modest fall in gross margins. It should be noted that the EPS figure included an $84 million pre-tax write-off of technology assets.

We have updated our model following the full-year fiscal 2021 release. We now forecast Costco’s Revenues to be around $213 billion for fiscal 2022 (ending August 2022), up 9% y-o-y, compared to a prior forecast of a 7% y-o-y growth in revenues. We also expect EPS to come in at $12.19, up 8% from fiscal 2021, compared to our prior estimate of $12.05. Given the changes to our revenues and earnings forecast, we have revised our Costco’s Valuation to $485 per share, based on $12.19 expected earnings per share (EPS) and a 39.8x P/E multiple for fiscal 2022 – marginally lower than the current market price. We believe COST stock appears appropriately priced at the current market price of around $490.

[Updated: 09/22/21] COST Q4 Pre-Earnings

Costco (NASDAQ: COST) is scheduled to report its fiscal fourth-quarter results on Thursday, September 23. We expect COST to likely beat the revenue and earnings expectations, driven by growth in comparable sales. The warehouse club operator has been firing on all cylinders during the challenges of the pandemic. In fact, the company’s sales grew 18% in the first three quarters of fiscal 2021 – despite tough comparisons from the prior year when consumers had fewer options to spend their money. This was largely due to a jump in inflation and a short-term surge in retail spending. In early September, Costco already put out that it ended this fiscal year (ended Aug) on a high note as it saw net sales rise 17% to $61.4 billion during the fourth quarter. The company’s comparable sales grew 9% excluding the impact of gasoline prices and foreign exchange during this period. All this suggesting that the company should be able to sustain this growth momentum going forward, as well. In the upcoming results, we expect the company’s new member additions and membership fee income to also show robust growth as shoppers continued to spend freely through late August.

Our forecast indicates that Costco’s valuation is $456 a share, which is slightly higher than the current market price of roughly $452. Look at our interactive dashboard analysis on Costco‘s pre-earnings: What To Expect in Fiscal Q4? for more details.

 (1) Revenues expected to be ahead of consensus estimates

Trefis estimates COST’s FQ4 2021 revenues to be $62.6 Bil, 2% higher than the consensus estimate of $61.2 Bil. It should be noted that the company’s overall revenue is calculated by adding the net sales (already reported) and membership fees. In fiscal 2021 so far, the retailer’s gross margin improved by approximately 0.4 percentage points, driven by the tailwinds of higher labor productivity and lower spoilage for fresh foods (due to higher sales). As far as e-commerce goes, Covid-19 has given Costco a chance to build out its own business. E-commerce revenue grew 50% in fiscal 2020 and climbed another 43% through FY 2021. Costco has the lowest markup in the retail industry which creates an extremely compelling value for members. The company’s member renewal rate has been hovering around all-time highs of 91% so far in fiscal 2021. And, another strong indication here in the Q4 results will imply a healthy momentum heading into the crucial holiday season.

2) EPS likely to be ahead of consensus estimates

COST’s FQ4 2021 earnings per share (EPS) is expected to be $3.62 per Trefis analysis, 2% ahead of the consensus estimate of $3.55. In the first 36 weeks of FY 2021, the retailer’s operating income surged 26% y-o-y, despite higher selling, general, and administrative expenses. Also, Costco’s earnings per share grew 28% y-o-y to $7.51.

For the full year, we expect Costco’s net margin to grow slightly to 2.4% in fiscal 2021. This coupled with a 17% y-o-y growth in Costco’s revenues, could lead to a rise of $800 million y-o-y in net income to $4.8 billion in 2021. All this, resulting in a possible EPS increase from $9.01 in FY 2020 to around $10.74 in FY 2021.

(3) Stock price estimate higher than the current market price

Going by our Costco’s valuation, with an EPS estimate of around $10.75 and P/E multiple of 42.5x in fiscal 2021, this translates into a price of $456, which is marginally higher than the current market price of around $452.

It is helpful to see how Costco’s peers stack up. COST Stock Comparison With Peers shows how it compares against other peers on metrics that matter.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

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