If there's one outcome that's almost guaranteed whenever there's economic flux, it's that Costco Wholesale (COST -0.48%) will come out on top. The warehouse retail superstar is a winner in any environment, but it shows its deepest colors when consumers care more about cost. That's why the company is still posting higher than normal sales increases and why this is a top stock for your portfolio in 2022.
Essentials, and everything else
Costco sells everyday essentials in bulk from its huge warehouses. This powered sales during the pandemic, when consumers focused on essential goods while under lockdown. However, it also sells all sorts of other goods, such as appliances, fine jewelry, and even travel services at discount prices.
Sales of those other items picked up as people began to branch out in their spending as restrictions were lifted. But the economy is still experiencing volatility in the aftermath of early pandemic policy, and inflation is driving up prices as well as sending customers to buy their groceries at the cheapest prices they can find -- meaning Costco.
Image source: Getty Images.
Costco is one of few public companies that report monthly earnings, and in January, it continued posting excellent growth. Sales increased 15.5% year over year, which was particularly noteworthy given that January 2021 had already shown strength with 18% sales growth compared to January 2020. Comps increased 14% in January 2022. For comparison, in January 2020, right before the pandemic came to U.S. shores, sales increased 8%. And that was a fairly typical increase for that time period.
Costco's sales, and specifically comparable, or same-store sales, play a big part in the increases. In January, U.S. comps increased 14%. In the first fiscal quarter, comps increased 15%, with traffic up 6.8% globally and average transaction amounts up 7.7%. These numbers suggest a highly engaged consumer base that is choosing to spend more of its money at Costco.
Even though Costco's goal is razor-thin margins, its strategy supports so much volume that the bottom line is well padded. In the first quarter, earnings increased to $2.98 per share from $2.62 last year. Membership fees play a large role, and they increased 9.9% year over year in the first quarter, with an 89% global renewal rate.
Inflation affected first-quarter margins, which were lower year over year, and that likely continued into January's numbers. Costco has increased some prices to meet the challenge, but its huge volume and commitment to low prices mean it plays a slightly different game than other retailers. It has a more nuanced approach to pricing, which is a central element of its model. CFO Richard Galanti said on the first-quarter earnings call, "We've always said we want to be the last to raise the price and the first to lower the price." That dictates how it operates in any environment, but it becomes crucial when inflation hits customers' pockets.
Management said that the Chinese New Year, which occurred on Feb. 1, or 11 days earlier than last year, favorably impacted January international sales by 4% and total company sales by 0.5%. That's something to note that could unfavorably impact February sales.
New stores mean more sales
Costco opens new stores, or units, at a slow place. It opened eight net new stores in the first quarter, with plans for another 19 total for the rest of the year. It recently opened its second warehouse in both France and China, and global expansion gives it a tremendous long-term growth runway. It operates 828 global warehouses, with 572 in the U.S.
This is different than other retailers, who typically open many more stores more quickly. Each Costco warehouse is big -- around 146,000 square feet -- and requires a large capital outlay. Each one brings in far more revenue than a smaller competitor store. For example, for a rough comparison, Target operates 1,926 stores, and 2021 fiscal third-quarter revenue, a similar period to Costco's first quarter, divides into about $13 million per location, whereas Costco's 828 warehouses in the first quarter each on average produced $60 million.
Costco stock gained 50% in 2021 and is down 10% in 2022. That brings its valuation to 44 times trailing 12-month earnings, still a premium price to pay for shares. But that's warranted considering Costco's future opportunities for growth, and the small correction shouldn't scare investors.
