As inflation runs hot, all eyes are on the corporate margins. Notably, increased commodity prices and higher labor and freight costs are taking a toll on corporate margins. As for the membership-only big-box retailer Costco (COST), it incurred a $30 million LIFO (one of the methods to account inventory and cost of sales) charge in Q4, “the first such charge since 2014.”
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Costco stated that this is due to inflationary cost pressure. Looking ahead, Costco expects price inflation on the products it sells to be 3.5% to 4.5%, which is higher than its previous expectation of 2.5% to 3.5%. The company continues to mitigate the cost increases, though.
Costco’s CFO, Richard Galanti, said during the Q4 conference call that Costco is taking steps to offset higher costs “in a variety of different ways.”
Despite higher commodity and freight charges in the background, Robert Ohmes of Bank of America Securities increased his FY22 EPS estimate to $11.75 from $11.50. Ohmes expects higher sales and lower SG&A (selling, general and administrative) expense rates to offset the cost pressure. He added that “the return of higher margin ancillary growth & the continued integration of Costco Logistics” will also help to “mitigate a higher price & cost inflation expectation.”
Ohmes predicts that new store openings and strong membership renewal trends will boost Costco’s comps (comparable-store sales). The retailer ended Q4 with 111.6 million cardholders, up 1.8 million sequentially. Furthermore, its total paid households reached 61.7 million.
Costco’s membership renewal rate remained high, at 91.3% for the U.S. and Canada. Meanwhile, its worldwide renewal rate also improved on a quarter-over-quarter basis to 88.7%. Costco generated $3.9 billion from membership fee income in FY21. Thanks to its solid fundamentals and loyal membership base, I have a bullish outlook on Costco stock.
Costco stock has gained over 31% in the last six months and trades at a premium compared to its historical average. (See Costco stock charts on TipRanks)
However, Ohmes views Costco’s “premium valuation as appropriate.” Ohmes stated that Costco’s strong traffic growth, solid membership trends, and strength international segment support its premium valuation.
Ohmes maintained a Buy rating on Costco stock and increased the price target to $500 (6.9% upside potential) from $490.
On TipRanks, COST stock has an analyst rating consensus of Moderate Buy, based on 13 Buys and 5 Holds. The average Costco price target of $480.13 implies 2.7% upside potential to current levels.
Disclosure: On the date of publication, Amit Singh had no position in any of the companies discussed in this article.
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