Even though Costco (Nasdaq: COST) reported admirable quarterly results this week, some stockholders are getting squeamish. Long-term investors should resist that fear and hold on to this great stock.
Costco's third-quarter earnings increased 5.9%, to $324 million, or $0.73 per share. Net sales surged 16%, to $20.19 billion. Same-store sales increased 12%; strip out gasoline price inflation and foreign currency effects, and total comps still increased an impressive 7%. Even in the U.S. market, Costco performed well, with comps increasing 10% (or 6% without gas and foreign currency).
Meanwhile, Costco's membership fee revenue also increased, showing that even in this tough economic climate, plenty of consumers remain willing to pay up for Costco's great deals.
Costco's profit did miss analysts' estimates, providing one explanation for investors' current negativity. Costco must also contend with the same inflationary price pressures currently plaguing many consumer-facing companies. The company's efforts to keep prices down for its customers are eating into its profit.
However, compared to the outright struggles that many consumer-facing companies endure these days, Costco looks pretty darn good. Wal-Mart (NYSE: WMT) continues to flounder here in the U.S., and a ton of other retailers and consumer-goods companies have reported disappointing quarters and outlooks. Fellow discounter Big Lots (NYSE: BIG) joined the chilly chorus of companies reporting profit and sales drops. On the other hand, BJ's Wholesale (NYSE: BJ) bucked the trend and reported a better-than-expected quarter.
Many companies are passing on price increases to consumers, as risky as that may be. Faced with the soaring cost of their raw materials, Starbucks (Nasdaq: SBUX) and J.M. Smucker (NYSE: SJM) announced plans to raise coffee prices recently.
Costco's wise to put off passing price increases to its shoppers for as long as it can. Losing its reputation as a purveyor of good deals would hurt its long-term success, which is much more important than assuaging investors and Wall Street analysts right now.
Furthermore, sacrificing margins to boost sales volume has worked well for other companies in the past. Amazon.com (Nasdaq: AMZN) has frequently employed this strategy, helping the e-commerce giant retain its competitive edge through thick and thin.
Although Costco's multiples tend to be pricier than those of its peers, paying up for a gold-standard stock is worth it. What Costco sacrifices now will help it succeed for the long haul; long-term investors know that, and may even hope for a few bearish price drops to get shares just a tad cheaper. Regardless, whatever you do, don't ditch Costco.
