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Costco earnings rarely disappoint. Why stock investors should hope they do

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Costco’s earnings rarely disappoint.

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Costco

is not the kind of company that brings a lot of bad news and Thursday’s earnings report shouldn’t be any different. Still, investors looking to buy a dip may want to hope for some.

Between its long history of positive earnings and strong monthly sales updates — the latest of their kind among major retailers — Costco Wholesale’s (COST) quarterly results typically don’t hold many surprises. That will likely be the case when the company reports its fiscal fourth quarter after the bell today: We learned earlier this month that the quarter’s comparable store sales were up double-digit when it delivered its August update.

But anything in the report that could trigger a surge in the stock should be welcome to investors held back by the premium valuation. Although Costco is down 13% this year, that beats the


S&P 500s

21% fell, and the summer rebound blew ahead of that of the wider market as well. Yet the stocks, which have always risen, are by no means cheap. They are still switching hands at more than 34 times future profits, slightly above their five-year average of 33.

Hence the desire for bad news. For those who missed Costco’s multi-year run, or are hesitant to expand their position at that price, a chance to get the stock a little cheaper would be a treat.

Of course, it was a tough month for the market, and Costco is no exception. And a closer look reveals that the sell-off has actually made the stock less expensive compared to where they were last year. Costco is trading at 0.9 times the price to sell and 9.4 times the price to book, on a forward basis, both below their median since mid-September 2021. In fact, the average one-year earnings multiple for the year is over 38 time. By that measure, bargain hunters may already be intrigued.

Buying on the dip has undoubtedly been a profitable bet in the recent past. Costco is up more than 205% in the past five years, nearly four times the S&P 500. But what about those who fear they’ve missed the boat? There are trends that should comfort them.

Recent monthly same-store sales figures show Costco’s compositions are still more than 30% higher than where they were prepandemic, while traffic and the amount shoppers spend when they visit have increased. That indicates that the market share gains the company has captured during the pandemic are likely to be sustainable.

Then there’s the fact that “Costco’s membership trends have never been stronger,” as Baird analyst Peter Benedict noted earlier this month — and it could bring in additional revenue if it implemented a seemingly timely increase in membership fees, though it won’t. something that is expected to happen yet.

The reality is that, while high inflation, concerns about the price movement of the economy and inventory problems are indeed weighing on the retail sector as a whole, Costco sidesteps many of those concerns. The August update showed continued resilience in non-food categories, suggesting it has no glut of merchandise that its customers suddenly feel too tight to buy, not unexpected given its relatively affluent customer base.

The discounted gas may have helped traffic during the summer price spike, but in fact, traffic from Costco was above prepandemic levels throughout 2022 through Labor Day in 31 of the 36 weeks of the year, according to data from Placer.ai.

It’s clear that the company’s low-price strategy is resonating. Or as Jefferies analyst Corey Tarlowe previously told Barron’s, “value retailers like Costco are best positioned because…when people’s pockets are pinched, value wins.”

Investors can too.

Write to Teresa Rivas on [email protected]

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