You see it on the news and feel it every time you go to the grocery store or fill up your vehicle with gasoline -- inflation. Inflation has become a hot-button topic, mainly because it affects everyone. One way to counteract this effect is to purchase goods in bulk. This mindset makes a wholesale retailer like Costco (COST 0.91%) a must-own in today's market.
If you don't already own Costco, now could be an excellent time to open up a position. Here's why.
Image source: Costco.
A great value proposition in tough times
As mentioned, a Costco membership is a great way to fight inflation. First is the gasoline savings. If you fill up a 15-gallon tank weekly and save $0.20 per gallon compared to local stations, over the year, you'd save $156. Compared to a $60 annual Costco membership, you'd come out with nearly $100 in profit based on fuel alone.
This equation changes if Costco bumps up its membership price -- something it has typically done every five or six years. A membership price hike seems inevitable, with the last raise coming in 2017. However, management has no plans to bump prices, citing their satisfaction with current sales and membership renewal rates. In fact, Costco saw an increase in renewal rates during the Great Recession in 2008 and 2009, showing how consumers flock to Costco during challenging times.
Costco's management knows their customers and isn't greedy. This stance should give investors confidence that management has a good pulse on the consumer.
A second (and most obvious benefit) is buying items in bulk. While these items aren't insulated from inflation, they still offer savings to consumers versus buying in smaller quantities from other retailers.
Both of these benefits are substantial inflation fighters for consumers. And this ammunition is reflected in Costco's business results.
Solid results for tough times
Costco recently wrapped up its 2022 fiscal year (ending Aug. 28), and the results were impressive. In its Q4, sales rose 15.8% year over year (YOY) in the U.S. and 13.7% worldwide. However, when gas prices and foreign exchange rates are backed out, these numbers decrease to 9.6% YOY in the U.S. and 10.4% worldwide.
Obviously, rising fuel prices significantly affected its results, but Costco still grew revenue without the gas price bump.
Profits also rose as well. Earnings per share grew 12% YOY to $4.21 and came in at $13.17 for the full year.
Unfortunately for investors, Costco doesn't provide forward-looking guidance. But it reports sales every month. In September, Costco delivered more of the same results, with U.S. sales rising 11.2% with fuel prices and 8% without.
Costco's business seems right on track, but is the stock reasonably valued?
At 35 times earnings, Costco's stock isn't what anyone would consider "cheap." However, it is the cheapest it has been for some time.
COST PE Ratio data by YCharts
The best companies in the world seldom trade at a low valuation, and Costco falls into this category. However, many businesses will likely see their revenue fall if the economy plunges into a recession.
Costco may experience some falling sales, but with the value proposition of its membership, it likely won't be to the levels of other retailers. Plus, Costco warehouses are more widespread than in 2008 (550 versus 815 at the end of 2021). This footprint increases Costco's stability by reducing geographic risk -- a characteristic that is vital when the economy goes south.
Costco is a top stock to own in both good times and bad. Moreover, the loyalty of its members will only increase as the economy sours, making Costco a top stock to own during this bear market.
