Retail giant Costco Wholesale Corporation’s (COST - Get Rating) global presence and solid market position are helping it remain steady amid shifting consumer behavior and an uncertain economic climate. Despite high inflation, COST’s October net sales increased 7.7% year-over-year to $17.73.

Although consumers have been cutting on spending amid inflationary pressures, the National Retail Federation (NRF) today forecast that holiday retail sales during November and December will grow between 6% and 8% over 2021.

NRF Chief Economist Jack Kleinhenz said, “Despite record levels of inflation, rising interest rates, and low levels of confidence, consumers have been steadfast in their spending and remain in the driver’s seat.”

Moreover, inflation in October came in at 7.7%, better than consensus estimates, providing some relief to the consumers. This, along with the usual holiday shopping, should boost COST’s performance.

COST shares have gained 10% over the past month and marginally over the past year. However, the stock has lost 9.6% year-to-date to close the last trading session at $513.13.

Here is what could shape COST’s performance in the near term:

Solid Financials and Dividend Paying Record

COST’s net sales came in at $70.76 billion for the fourth quarter that ended August 28, 2022, up 15.2% year-over-year. Its total revenue increased 15% year-over-year to $72.09 billion. Also, its operating income increased 9.8% year-over-year to $2.50 billion.

Moreover, its net income increased 11.9% year-over-year to $1.87 billion, while its EPS came in at $4.20, up 11.7% year-over-year.

In addition, COST has paid dividends for 18 straight years. Its dividend payouts increased at 12.4% CAGR for the past five years and 11.5% for the past three years. Its forward annual dividend of $3.60 per share yields 0.70% on the current price. This compares to its four-year average dividend yield of 1.44%.

Mixed Valuation

COST’s forward EV/EBITDA of 19.77x is 66.2% higher than the industry average of 11.90x. Its forward Price/Cash Flow of 22.74x is 62.4% higher than the industry average of 14.00x.

However, its forward EV/Sales of 0.88x is 48.1% lower than the industry average of 1.70x. Also, its forward Price/Sales of 0.92x is 26% lower than the industry average of 1.25x.

Favorable Analyst Expectations

COST’s revenue is expected to increase 8.3% year-over-year to $245.86 billion in 2023 and 6.8% year-over-year to $262.68 billion in 2024. Moreover, its EPS is estimated to rise 11% year-over-year to $14.59 in 2023 and 10.8% year-over-year to $16.17 in 2024.

In addition, its EPS is expected to grow 11.3% per annum for the next five years. The stock surpassed EPS estimates in all four trailing quarters.

POWR Ratings Reflect Promising Outlook

COST has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

COST has a C grade for Quality. Its trailing-12-month gross profit margin of 12.15% is 62.8% lower than the industry average of 32.63%. On the other hand, its trailing-12-month ROCE of 30.59% is 171.2% higher than the industry average of 11.28%.

Also, it has a C grade for Value, consistent with its mixed valuation multiples.

In the 38-stock Grocery/Big Box Retailers industry, COST is ranked #30. The industry is rated A.

Click here for the additional POWR Ratings for COST (Growth, Momentum, Sentiment).

View all the top stocks in the Grocery/Big Box Retailers industry here.

Bottom Line

The company has been witnessing sales growth despite the macroeconomic headwinds. Moreover, Wall Street analysts expect the stock to hit $552.47 in the next 12 months, indicating a potential upside of 7.7%. Given the stock’s positive outlook, COST could be an ideal Buy ahead of the holiday season.

How Does Costco Wholesale Corporation (COST) Stack up Against Its Peers?

While COST has an overall POWR Rating of B, one might consider looking at its industry peers, Ingles Markets, Incorporated (IMKTA - Get Rating), Casey’s General Stores, Inc. (CASY - Get Rating), and Walmart Inc. (WMT - Get Rating), which have an overall A (Strong Buy) rating.

COST shares were trading at $514.38 per share on Friday afternoon, up $1.25 (+0.24%). Year-to-date, COST has declined -8.79%, versus a -15.13% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries. More...

More Resources for the Stocks in this Article