It hasn't been smooth sailing for investors this year, as the Federal Reserve's aggressive rate-hiking schedule dampens enthusiasm for the stock market. Investors, once in love with high-flying tech stocks and risky cryptocurrencies, decided to reassess their risk tolerances as the country faces a looming recession. That led to some stocks being better buys right now than others.
With its shares down about 13% so far in 2022, is now a good time to buy Costco Wholesale (COST -0.47%)? Let's try to find out whether this top retailer is worthy of your capital investment.
Recent Costco financials suggest solid performance
Costco's business continues humming along, as its recent financial results show. In the latest fiscal year (ended Aug. 28), total revenue was up 15.8%, and net income increased 16.7% versus the prior year. And same-store sales (known as comps), a key performance indicator for retail businesses, jumped 14.4% on a year-over-year basis, which is outstanding any way you look at it.
The company ended the most recent fiscal year with 65.8 million membership households, up 6.5% compared to a year ago. And in the latest quarter, the membership renewal rate in the U.S. and Canada was a superb 92.6%, showcasing just how much customers value the warehouse chain. Costco hasn't raised the monthly fee for its memberships, which cost $60 for the basic Gold Star plan, in quite some time.
"In terms of membership fees and a possible increase, there are no specific plans regarding a fee increase at this time," said CFO Richard Galanti on the Q4 2022 earnings call. "We're pleased with our growth in both top-line sales and membership households over the last several quarters and in member loyalty, as reflected in increasing member renewal rates." Customers will appreciate this stance by management, particularly in today's economy.
Costco's recent results continue to exhibit strong momentum in the face of a weakening macroeconomic backdrop. And this performance is something investors want to prioritize right now when assessing their portfolios.
Costco has all-weather appeal
The beauty in owning a company like Costco is that shareholders don't necessarily need to predict when an economic downturn is set to happen. The business's culture focuses relentlessly on taking care of customers with the lowest prices possible, something that never goes out of style. In both a strong economy and surely in a recession, customers always seek out value. And this sort of win-win situation that Costco offers should be extremely attractive to investors.
How exactly is Costco able to provide such outstanding value? Well, it comes down to one thing: scale. Over the trailing-12-month period, the business generated $227 billion in total revenue. And this gargantuan amount means that Costco has tremendous bargaining power with its suppliers. Buying huge quantities of a smaller number of different items gives Costco favorable purchasing terms, and these savings are passed to customers in the form of low prices.
Add massive scale to a lucrative membership-based business model, and Costco is able to mark up merchandise on average only 11%, far lower than the average markup at other big retailers like Walmart or Home Depot.
Plus, the company's 842 warehouses sell a broad assortment of goods, ranging from electronics and appliances to apparel and groceries. In a recession, consumers who want to save money on gas and limit their driving might choose to knock out their entire shopping lists at Costco in one stop. Given the uncertain economic outlook right now, this will support the business over the next six to 12 months.
Another benefit (from an investment perspective) that Costco possesses is that its business isn't prone to technological disruption. Before the market turmoil in 2022, investors were enamored by growth tech stocks that could seemingly rise to the sky with no end in sight. While some of these companies certainly have investment merit, many don't. And to make matters worse, they operate in industries undergoing constant change. A product or service that's popular and experiencing huge demand now might easily fall out of favor in a short time. With Costco, investors don't have to worry about this.
Costco's warehouses offer customers great value, but the stock doesn't appear to do the same for prospective investors. Currently, shares trade at a price-to-earnings ratio of 38, more than double Target's valuation. But this price might be justified, given how high quality Costco's business is. Investors might want to allocate a small percentage of their overall portfolios to this first-class retailer right now and add more to the position over time.
