[Note: Costco’s fiscal year ends in August]
Costco (NASDAQ: COST) is scheduled to report its fiscal third-quarter results on Thursday, May 26. We expect Costco to likely beat the revenue and earnings expectations, driven by growth in comparable sales. Costco reports monthly sales updates, implying that investors already know how Costco deals with inflation, supply chain problems, and other macroeconomic factors. Costco’s sales increased 19% year-over-year (y-o-y) in March, a significant increase from the second quarter (which saw sales growth of 16% y-o-y). In addition, the warehouse club giant’s sales rose 14% in April over the previous four weeks. Despite a likely big slowdown in the month of May, the third-quarter sales growth is still expected to be elevated y-o-y. That said, the company’s strength becomes more apparent during tough economic times. It should also be noted that the monthly reports do not include any information on Costco’s profitability, which may be just as hard-pressed as its competitors – Walmart (NYSE: WMT) and Target (NYSE :TGT).
Our forecast indicates that Costco’s valuation is $469 a share, which is 7% higher than the current market price. Look at our interactive dashboard analysis on Costco‘s Earnings Preview: What To Expect in Fiscal Q3? for more details.
(1) Revenues expected to be slightly ahead of consensus estimates
Trefis estimates COST’s FQ3 2022 revenues to be $51.9 Bil, marginally higher than the consensus estimate. Costco reported a comparable sales rise of 14% in FQ2 (quarter ended Feb 13) and its revenues grew 16% to $51.9 billion. The prices at Costco are rock bottom and its membership fee-based model drives its high volumes. The retailer saw increased sales due to stockpiling at the beginning of the pandemic, and now sales are increasing as customers seek to combat inflation.
As costs rise in many areas, such as finished products, raw materials, and freight, Costco is straining itself to keep prices down. Due to its size and volume, it can negotiate deals with suppliers to absorb some of it, and it’s also absorbing some on its own. It has also chartered seven vessels to ease the supply chain difficulties between the U.S., Canada, and Asia. – which will help it circumvent some of the logjams holding up its supply chains. For the full-year 2022, we expect Costco’s Revenues to grow 14% y-o-y to $223 billion.
2) EPS likely to be marginally ahead of consensus estimates
COST’s FQ2 2022 earnings per share (EPS) is expected to be $3.09 per Trefis analysis, slightly ahead of the consensus estimate. In the second quarter, the company’s earnings per share increased from $2.14 last year to $2.92 this year. Membership fees play a large role here, and they increased nearly 10% y-o-y to $967 million, with a 90% global renewal rate. Costco’s total cardholders increased by 1.7 million from the end of the first quarter to $115 million. The executive members, particularly, accounted for nearly 43% of the total cardholders and contributed 71% to total company sales. Overall, membership fee income flows almost entirely to the bottom line as there are very few expenses associated with an incremental increase.
(3) Stock price estimate higher than the current market price
Going by our Costco’s valuation, with an EPS estimate of around $13.20 and a P/E multiple of 35.6x in fiscal 2022, this translates into a price of $469, which is 7% higher than the current market price.
It is helpful to see how its peers stack up. COST Peers shows how Costco’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||-5%||-17%||76%|
|Trefis Multi-Strategy Portfolio||-8%||-23%||201%|
 Month-to-date and year-to-date as of 5/25/2022
 Cumulative total returns since the end of 2016