Costco Shares Resilient in a Tough Market

Costco Wholesale Corp. (COST) fell 1.4% on Friday, despite better-than-expected Q2 2022 top and bottom line results. The company failed to raise guidance, raising shareholder anxiety about profit margins, given the twin headwinds of rising inflation and macro political events. Fortunately, the big box giant’s international exposure is mostly confined to Mexico, Canada, and Western Pacific allies, despite widespread headlines when China’s one store opened in 2019.

Long-Time Retail Rock Star

Costco’s low churn reflects high member loyalty, driven by a narrow focus on value. Online sales are growing at a rapid pace as well, reflected in the quarter’s solid metrics. Membership fee income grew by 9.8% while USA, Canada and worldwide renewal rates rose 92.0% and 89.6%, respectively. E-commerce grew by 12.5%, adding to extraordinary growth of 75.8% in the same quarter last year. Meanwhile, strong growth should continue in gasoline sales, which typically boom when crude oil prices impact consumer buying power.

Telsey Advisory Group analyst Joe Feldman raised his target to $615 on Friday, noting that Costco reported “impressive 2QF22 earnings, and the strong sales momentum continued in February. The company’s 2QF22 adjusted EPS came in at $2.92, easily beating our inline estimate of $2.75, reflecting a strong headline comp of 14.4%  and better-than-anticipated adjusted operating margin expansion of 50 bps to 3.5%.Overall, Costco’s 2QF22 EBIT dollars showed a healthy increase of ~35% to $1.8B, a sign of profitable market share gain”.

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating based upon 17 ‘Buy’, 4 ‘Overweight’, 11 ‘Hold’, and 2 ‘Underweight’ recommendations. No analysts are recommending that shareholders close positions. Price targets currently range from a low of $284 to a Street-high $650 while the stock is set to open Monday’s session about $50 below the median $572 target. This placement suggests that Costco will build on gains when current volatility levels revert to the mean.

Costco has been a market leader for years, posting superior annual returns. It didn’t skip a beat after the March 2020 selloff, breaking out in a new uptrend in July. A steep pullback got bought aggressively in March 2021, ahead of an intense buying wave that added nearly 70% into December’s all-time high at 571.49. Profit-taking since that time has been orderly, with price action holding well above the 200-day moving average in the 470s. There’s little reason to believe, at least at this time, that sellers will break that trading floor.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.