If you're like many Americans, not only do you have a Costco Wholesale (COST 0.17%) membership, but you've been shopping at the company's warehouses more as inflation has made it harder to stretch your dollar.
Unlike most other retailers, Costco continues to post higher-than-usual sales growth even as pandemic boosts have made way for inflation busts. However, in the most recent earnings reports, even the recession-proof Costco has been showing signs of slowing down.
The stock faltered after the latest report in September, and it's down 17% this year. Shares are now trading at 36 times trailing-12-month earnings, down from close to 50 earlier in the year and in line with historical norms. Is now the right time to buy?
A recession-proof model
Costco has been enjoying an unprecedented run in sales growth. Pre-pandemic, year-over-year quarterly sales growth was a reliable mid- to high-single digit, and shareholders benefited from the warehouse retailer's steady success. Over the past two years, that's been more like mid- to high teens sales growth.
It mostly boils down to pricing. As inflation has set in, customers are moving their essentials shopping over to the cheapest place around, which is usually Costco. There's a confluence of factors that have allowed Costco to keep many of its prices down. These include its fee-based model, which gives it guaranteed revenue and promotes loyalty.
Due to its size, it has been able to forge relationships with suppliers that give it leverage in the supply chain. Also due to its size, as well as robust cash reserves, it has been able to develop its own company-operated logistics network over the past year to bypass many supply chain logjams and the associated increased costs.
Even Costco is finally feeling the heat
Even Costco hasn't been able to sustain year-over-year sales increases as high as 20%, and that shouldn't come as a surprise in this economy.
In the fourth quarter (ended Aug. 28), sales growth remained high at 15%, and comparable store sales growth was 14%. Checking monthly progress tells a changing story.
| Metric | September | August | July | June |
|---|---|---|---|---|
| YoY sales growth | 10% | 11% | 11% | 20% |
| YoY comps growth | 8.5% | 10% | 10% | 18% |
Data source: Costco monthly reports. YoY=year-over-year.
CFO Richard Galanti also updated shareholders that inventory remained up 26% in the fourth quarter, the same as the third quarter. Some of that increase is just due to inflation, and part was due to being under-supplied last year, but part of it is a spending slowdown. He also said that management was confident in inventory levels evening out in the coming weeks.
How Costco is handling inflation
Galanti also reiterated that the company is focused on driving volume above all else. That's how it's able to keep some of its famous prices, like the $4.99 rotisserie chicken. Instead of pumping up some prices to expand margins, it keeps them down and attracts more overall sales.
Galanti said: "If we can incrementally get another percentage point of comp[arative] sales, that does more than any kind of [margin] harvesting we would ever want to do, which we don't do." He also said Costco hopes to keep low prices on items like hot dogs "forever." That's a long time and a real commitment that investors should note.
Why should you buy?
As sales growth decelerates, the premium investors have given to the stock price is coming down. But that's good news for new investors, because the lower price provides a favorable entry point. If you couldn't stomach the high valuation, you now have an opportunity to buy in at a more reasonable price.
It doesn't look like Costco's stock price is going to pop in the near future, but investors who are looking for good deals and have the time to wait should consider buying shares now.
