Shares of warehouse club retail kingpin Costco (NASDAQ:COST) added to last year’s parabolic gains, with the stock’s recent spike to all-time highs. Despite soaring close to 67% in the past year alone, I remain as bullish as ever over the big-box retailer going into earnings, which are on tap for May 30, 2024.
Undoubtedly, expectations are high for Costco’s coming quarter. However, amid inflation, shopping for great deals at the grocery aisle (and elsewhere) has become almost like a competitive sport. And if Walmart’s (NYSE:WMT) incredible quarter is any indication of what’s to come for the retail scene, I think you have to stick with COST stock in spite of the loftier price of admission.
With huge crowds hungry for deals, Costco continues to deliver on the ‘treasure hunt’ experience, now offering actual treasure in gold and silver bullion. These items reportedly pull in around $200 million every month combined. Thus, Costco seems poised to benefit once the American economy gets rolling again.
Even if it doesn’t and inflation lingers like cigarette smoke in a theatre, Costco will be there to offer the best prices, and consumers will buy them in bulk while paying an annual membership to do so. If that sounds like a truly wonderful business model, that’s because it is.
Costco’s Running Hot Into Earnings. Can It Run Out Even Hotter?
The biggest takeaway, I believe, from Walmart’s latest quarter was richer consumers were flocking over for those impressive deals. Indeed, even more affluent consumers seem to have an increasing appetite for Great Value (no pun intended) these days. Despite winning the business of richer shoppers, Walmart is far from a lavish place to spend.
When it comes to the quality-to-price ratio, there’s no question that Walmart would drive the ratio higher with its incredibly low prices. But in terms of quality for a decent price, I think it’s safe to say Costco punches well above its weight class, thanks in part to its private label Kirkland Signature, a brand that a lot of loyal members swear by.
If Walmart had seen its latest quarterly result buoyed by wealthier consumers, perhaps Costco would have enjoyed an even bigger boost, given the power of the Kirkland brand and the retailer’s knack for appealing to higher-income shoppers relative to the likes of Walmart.
Only time will tell how Costco’s next quarter fares in the face of elevated analyst expectations. Regardless, I’d be very surprised if Costco falls short as Walmart flies high. That would indicate that Walmart may be in a spot to take market share away from Costco — something that I’d have to wait and see to believe.
As the U.S. Economy Bounces Back, Costco Will Be Ready to Cash In
When it comes to brands that are trusted for the value they deliver, it’s tough to top Costco. Perhaps Walmart may be able to stack up versus Costco for consumers who are off-put by annual membership dues. Regardless, if you seek the absolute best prices, Costco is often the optimal place to shop, assuming you live close to one of their warehouses, in bad times but also in good.
With its $1.50 hotdog and pop combo, razor-thin margins on most of the goods sold in-store, and very few membership price hikes over the years, it’s not a mystery as to why Costco customers have been loading up in the face of high inflation and economic unknowns. If a recession is what you fear, Costco’s the place to shop at. And if the U.S. economy gets roaring again and disposable income swells, my bet is that Costco will continue to be the place to shop.
Apart from price, Costco’s next big advantage may lie in the magnitude of trust its members put in it. You’re probably not going to get a wide selection of certain goods over at Costco. However, what you will get is a promise of a high-quality item and a competitive price. And for many, the lack of selection is a sacrifice worth making for those inclined to buy in bulk, even having never tried an item.
How many companies can convince you to bulk buy an item you’ve never had the chance to test? Perhaps Sam’s Club, but apart from that Walmart-owned Costco rival, my guess is not that many. In any case, I view Costco’s managers as excellent curators. Whatever they put on shelves, consumers seem more than happy to buy.
As Costco begins to effectively leverage the data trove on its members (one of the perks of the membership model is access to customer data), the company may just be able to upsell customers on “must-have” discretionaries once consumers are flush with cash again. Perhaps they’re already skating to where the puck is headed with the decision to sell gold bars at stores.
The big question is, what’s the next item that will sell like hotcakes and get people talking? I have no idea, but Costco’s managers probably do, as they leverage the power of data analytics to make smart, data-driven decisions.
Is COST Stock a Buy, According to Analysts?
On TipRanks, COST stock comes in as a Moderate Buy. Out of 23 analyst ratings, there are 17 Buys and six Hold recommendations. The average COST stock price target is $793.73, implying downside potential of 0.45%. Analyst price targets range from a low of $650.00 per share to a high of $870.00 per share.
The Bottom Line on COST Stock
Costco stock is running hot ahead of earnings later this month. Despite this, I’m not yet ready to throw in the towel — not while the company continues delivering value amid inflation while adding new items to its “treasure hunt” experience. As the firm taps into the power of its data, I expect its strengths will carry over into a booming economy that sees discretionary good demand take off.
Costco members are incredibly loyal to the firm, and it’s not hard to see why. I attribute it to management’s devotion to its mission: to provide members with quality goods and services at the lowest possible prices. Costco members know they’re not going to get pinched for every last bit of margin, whether we’re talking gold bars or rotisserie chickens. It’s no wonder why the late Charlie Munger was such a fan of the company.
