With inflation continuing to be a thorn in most retailers' sides, you might be surprised to learn that one retailer is posting accelerating growth. Costco Wholesale (COST 0.54%) has been posting simply outstanding performance since the pandemic started. Instead of beginning to ebb like rivals Walmart and Target, Costco sales have been increasing at a faster rate. It's demonstrating once again that when times are tough, it performs best.
Crushing inflation
Prior to the pandemic, Costco was chugging along with mid to high single-digit year-over-year sales growth in a typical quarter. That shot up to double digits when the pandemic started and there was a scramble for essentials. In the aftermath -- as many retailers deal with supply chain problems, people cutting back on spending, and excess inventory -- Costco's sales growth is getting stronger.
That was apparent in the third fiscal quarter (ended May 8), right around the time other retailers were posting sharply decelerating sales. Costco bucked that trend with a 16% sales increase from the prior-year period to $51 billion, including a 17% increase in U.S. comparative-store sales (or comps). Earnings increased as well, with earnings per share (EPS) growing from $2.75 last year to $3.05 this year, although margins were slightly down.
At the time, though, it wasn't clear whether this would last, worsen, or possibly improve. So far, it's getting better. Costco released monthly earnings updates, and June sales were elevated, increasing 20% over last year, including a 21% increase in U.S. comps.
A resilient model
Although Costco sells everything from milk and bread to jewelry and vacation packages, most of its sales come from essentials. These are products consumers generally spend money on even in an inflationary environment when they might cut back on almost anything else. But when prices are rising, they want to get the most bang for their buck, leading them to Costco's warehouses.
Costco has some of the industry's lowest product margins, at around 11% to 12%, while supermarkets are typically in the mid to high 20s. It makes up for low markups with huge volume. It offers the best price to the customer and makes that dependent on owning a membership, which also increases loyalty. In this kind of market, though, it's more than loyalty that brings them in to shop.
Membership fees also play an important role in the model. In the third quarter, membership fees increased more than 9% to $983 million, and they're likely to break through $1 billion in the near future. The U.S. renewal rate is generally over 90%, and the global renewal rate was 90% for the first time ever. The renewal rate for first-year members was also higher than usual.
Costco is raising prices as well, but it's straddling the line between increased costs and being a discount retailer. Senior Vice President Bob Nelson said on the third-quarter conference call: "I think it's easier for us to pass on higher pricing...assuming that we show that value in the marketplace."
A great stock for any portfolio
Costco is beating the market in 2022, and it's outperformed the S&P 500 for many years.
The shares aren't cheap, and they're climbing back up in valuation after falling along with the price. They trade at a price-to-earnings ratio of 39 right now, but there's a reason for this premium, and it's playing out very obviously right now. Costco also pays a dividend that yields 0.74% as well as an occasional, high special dividend.
Costco is a resilient, no-brainer stock to own and offers years of growth and stability for your portfolio.
