Costco Wholesale (COST 0.11%) reported fiscal 2022 third-quarter earnings after the markets closed on Thursday, May 26. The membership warehouse retailer delivered another quarter of double-digit sales increases as consumers looked for more bang for their buck.

The coronavirus pandemic has created supply-chain bottlenecks worldwide. Decreasing supply, coupled with robust consumer demand, has brought about rising inflation. Costco has a reputation for providing quality at an excellent value -- a feature that is paying off in the current economic backdrop.

Let's look closer at Costco's Q3 results.

A person shopping in a store.

Image source: Getty Images.

As inflation pinches budgets, consumers seek value

In its fiscal third quarter, which ended on May 8, Costco generated net sales of $51.6 billion. That was up by 16.3% from the $44.4 billion it earned during the same quarter in the prior year. Sales were fueled by an increase in shopping frequency of 5.6% and a rise in average transaction total of 7.6%. Costco has seen sales climb faster than usual since the pandemic's onset. Compare its most recently completed quarter's 16.3% growth rate with its compound annual growth rate in the last decade of 8.2%.

COST Revenue (Annual YoY Growth) Chart

COST Revenue (Annual YoY Growth) data by YCharts. YoY = year over year.

Surging sales started at the onset when non-essential retailers were forced to close their doors, and Costco remained open. Customers with fewer options joined Costco at increasing rates. Observing excellent value, the members that Costco gained during the lockdown stages are sticking around. Indeed, management noted that renewal rates for first-year members are significantly higher than usual. Costco has been attracting new members due to its excellent value proposition -- a feature consumers are looking for as inflation pinches their budgets.

Overall, Costco boasted 64.4 million membership households as of May 8 -- 6% higher than last year. Renewal rates in the U.S. ticked up to 92.3% and stood at 90% worldwide. In other words, more than nine out of 10 members renewed their memberships. Folks pay $60 per year for the standard membership and $120 for the executive, with 2% cashback on all Costco purchases.

Costco is slow to raise prices on products even as it sees its costs go higher. Senior vice president of financial planning, Robert Nelson, elaborated on rising costs in the conference call following the earnings release on May 26:

For Q1, we estimated price inflation was in the 4.5% to 5% range. For Q2, we had estimated 6-ish, if you will. And for Q3, in talking to our merchants, estimated price inflation was in the 7-ish percent range. However, we did see inflation in fresh foods come in slightly lower in Q3 versus Q2 a year ago as we began cycling high meat prices.

Impressively, despite the cost pressures, Costco increased diluted earnings per share to $3.04 in Q3, up from $2.75 in the same quarter last year.

Costco stock holds a considerable premium valuation

COST PE Ratio Chart

COST PE Ratio data by YCharts. PE ratio = price-to-earnings ratio.

The market reaction to Costco's results was muted. The stock is up less than 1% on the day following the announcement. Costco's excellent operating performance has already had investors flocking to the stock, raising its valuation to a price-to-earnings ratio above some of its retail competitors, Walmart and Target. Therefore, it will be challenging for Costco's shares to move higher from here.