[Note: Costco’s fiscal year ends in August]
Costco (NASDAQ: COST) is scheduled to report its fiscal fourth-quarter results on Thursday, September 22. 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 has dealt with inflation, supply chain problems, and other macroeconomic factors. The warehouse club operator has held out as a retail chain still posting double-digit net sales growth of 15% year-over-year (y-o-y) in the fourth quarter – despite rising global economic challenges. In addition, the company’s comparable sales rose 10% y-o-y in Q4, excluding the impacts of changes in gasoline and foreign exchange. That said, Costco has delivered an impressive run in the past two-plus years, one that illustrates just how resilient its business model is even during tough economic times. It should also be noted that the monthly reports do not include any information on Costco’s profitability or segment and membership revenue breakup.
Our forecast indicates that Costco’s valuation is $509 a share, which is almost in line with the current market price. Look at our interactive dashboard analysis on Costco‘s Earnings Preview: What To Expect in Fiscal Q4? for more details.
(1) Revenues expected to be slightly ahead of consensus estimates
Trefis estimates COST’s FQ4 2022 revenues to be $72.5 Bil, marginally higher than the consensus estimate. Costco reported a comparable sales rise of 11% (ex-fuel)) and its revenues grew 16% y-o-y to $51.6 billion in FQ3 (quarter ended May 8). 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. In fact, Costco has seen sales climb faster than usual since the pandemic’s onset. When compared to its Q3 revenue growth of 16.3%, the company’s revenue in the last decade grew at a compound annual growth rate of 8.2%.
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 portion of the rise, and it’s also absorbing some on its own. For the full-year 2022, we expect Costco’s Revenues to grow 13% y-o-y to $221 billion.
2) EPS likely to be marginally ahead of consensus estimates
COST’s FQ4 2022 earnings per share (EPS) is expected to be $4.30 per Trefis analysis, slightly ahead of the consensus estimate. In the third quarter, Costco’s earnings per share rose from $2.75 last year to $3.04 this year, despite supply chain pressure and a pre-tax charge related to increased wages. However, Costco’s gross margin did fall from 11.18% last year to 10.19% this year.
A membership fee increase is unlikely this year because of high inflation, but it will happen sooner rather than later. Costco generally raises its membership fees every five years, last raised in 2017. This should help the company boost its bottom line further.
(3) Stock price estimate matching current market price
Going by our Costco’s valuation, with an EPS estimate of around $13.25 and a P/E multiple of 38.4x in fiscal 2022, this translates into a price of $509, which is in line with the current market price. Costco’s ability to generate higher sales consistently, as well as turn them into profits, has impressed investors, and this has led to an elevated P/E as compared with its peers even before the pandemic, when it hovered around 30x.
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||-4%||-20%||70%|
|Trefis Multi-Strategy Portfolio||-4%||-19%||219%|
 Month-to-date and year-to-date as of 9/21/2022
 Cumulative total returns since the end of 2016