Costco Wholesale (COST -1.17%) reported its fiscal 2023 first-quarter results on Dec. 8, with net sales up 8.1% and diluted earnings per share (EPS) up 3%. These figures are a significant slowdown compared to the consistent double-digit growth that investors have gotten accustomed to in recent years, particularly since the pandemic started.
For a stock that has performed quite nicely over the past five years, crushing the broader market indexes, investors might now be inclined to sell on the softer financial report. But this might be the worst mistake that Costco shareholders could make as we wrap up 2022.
Blame the macro environment
Things have started to slow down, to be sure, as the company's latest numbers demonstrated. Richard Galanti, Costco's chief financial officer, pointed to a weakening economy. Discretionary purchases like consumer electronics and appliances, coupled with difficult comparisons from a year ago, deserve some blame here.
Inflationary pressures caused both the gross margin and operating margin to shrink versus the first quarter a year ago. But amid all the talk about the threat of a recession, foot traffic and ticket sizes increased 3.9% and 2.6%, respectively, which I definitely view as favorable trends.
It's understandable that investors would be discouraged with these results. Costco's pandemic-fueled boost over the past couple of years highlighted just how crucial the company's warehouses are for value-conscious customers looking to buy all of their essentials in one place. But it's not realistic to expect that to go on indefinitely.
Management didn't provide much guidance. But we can look at Wall Street for insights. Consensus analyst estimates call for revenue to jump 7.6% and EPS to climb 9.7% for fiscal 2023. These would be akin to pumping the brakes on the company's growth, but in this economy, shareholders should be pleased if those forecasts become reality.
Costco is a winning investment
If we zoom out, we'll clearly see just how wonderful a business Costco is. From fiscal 2017 through fiscal 2022, it posted annualized revenue and diluted EPS growth of 12% and 16.7%, respectively. The physical footprint expanded from 746 stores in November 2017 to 845 today. And the company's paid membership count rose by 17 million, or 34%, over the last five years.
These fundamentals demonstrate why the stock has increased 143% over the past five years, despite falling 19% in 2022. This outstanding performance handily beats that of the S&P 500 and tech-heavy Nasdaq Composite Index during the same period.
With trailing-12-month total revenue of $231 billion making Costco the world's third largest retailer, it's probably safe to assume future growth won't quite resemble the past.
Can the company more than double sales over the next decade, like it did in the prior decade, bringing its overall annual revenue up to the neighborhood of $500 billion? This isn't completely out of the question, as it implies more than 7% annual growth, but I'm not holding my breath. It's completely reasonable to forecast decelerating gains as a retail enterprise becomes as massive as Costco.
Tempering your expectations doesn't mean that you should dump the stock just yet, though. The company will continue to open more stores, with China as a sizable expansion opportunity. And the obsession with taking care of its customers by offering the lowest prices around, paired with its lucrative membership-based model, will certainly be valuable far into the future.
Just because the stock has run up 56% in the past three years and 143% in the past five years, and now might be posting single-digit growth in the near future, that isn't a strong enough argument for selling shares. Costco's stock now carries a price-to-earnings ratio of 35, which is substantially lower than the peak of nearly 50 from 13 months ago. Plus, you'd be hard-pressed to find a business of the same quality as Costco.
As a result, the worst mistake investors can make right now is to sell their Costco stock. And the best decision is to remain a shareholder.
