Costco Wholesale Corporation (COST) is involved in the operation of membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan. It offers branded and private-label products in a range of merchandise categories. The stock has gained 26.7% over the past year.

The retail sector has been under high pressure due to high inflation and supply chain constraints. However, amid multi-decade high inflation, consumers continue to spend on essentials like food, helping retailers pass on higher costs.

Despite market headwinds, COST posted third-quarter earnings almost at par with Wall Street forecasts, with modestly higher sales. The company’s sales increased 20.4% year-over-year to $22.8 billion, and comparable sales rose 18.1%, excluding the impact of changes in gasoline price and currency fluctuations.

Bob Nelson, the retailer’s Senior Vice President of Finance and Investor Relations, said, “We believe our solid sales increases and relatively consistent margins show that we have continued to strike the right balance in passing on higher costs.”

Furthermore, last month, COST’s Board of Directors declared a quarterly cash dividend on COST’s common stock of 90 cents per share. The quarterly dividend is payable on August 12, 2022, to shareholders of record at the close of business on July 29, 2022.

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

Latest Developments

In June, COST completed the purchase of 45% minority interest in Costco-Taiwan, a joint venture, from their long-time joint venture partners. The company has estimated that the purchase will be approximately one to one and one-half percent accretive to earnings per share.

Robust Financials

For the third quarter ending May 8, 2022, COST’s total revenue increased 16.2% year-over-year to $52.60 billion. Its operating income improved 7.7% from its year-ago value to $1.79 billion, while its net income grew 10.9% year-over-year to $1.35 billion. The company’s EPS increased 10.5% from the prior-year quarter to $3.04.

Impressive Growth Prospects

Street expects COST’s revenues to rise 13.7% in the current quarter, 15.4% in the current year, and 8.8% next year. The company’s EPS is expected to rise 5.4% in the current quarter, 17.9% in the current year, and 10.9% next year.

In addition, COST’s EPS is expected to rise at a 13.7% CAGR over the next five years. Furthermore, the company has an impressive earnings surprise history; it topped the consensus EPS estimates in each of the trailing four quarters.

Consensus Rating and Price Target Indicate Potential Upside

Out of the 18 Wall Street analysts that rated COST, 15 rated it Buy, and three rated it hold. The 12-month median price target of $558.83 indicates a 2.8% potential upside. The price targets range from a low of $494.00 to a high of $645.00.

POWR Ratings Reflect Solid Prospects

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. COST also has a B grade for Growth and Sentiment. The company’s year-over-year growth indicated by the consensus earnings estimates justifies its Sentiment and Growth grades.

Among the 38 stocks in the A-rated Grocery/Big Box Retailers industry, COST is ranked #28.

Beyond what I stated above, we have graded COST for Value, Quality, Stability, and Momentum. Click here to see the additional COST ratings.

Bottom Line

Despite high pressure faced by the retail sector due to rising inflation and supply chain constraints, COST reported robust financial performance and impressive revenue growth. Given the company’s impressive growth prospects, the stock still has enough upside left.

How does Costco Wholesale Corporation (COST) Stack Up Against its Peers?

COST has an overall POWR Rating of B, which equates to a Buy. Check out these other stocks within the Grocery/Big Box Retailers industry with an A (Strong Buy) rating: Natural Grocers by Vitamin Cottage, Inc. (NGVC), Ingles Markets Inc. Cl A (IMKTA), and Albertsons Companies, Inc. (ACI).

COST shares fell $2.82 (-0.52%) in after-hours trading Wednesday. Year-to-date, COST has declined -3.17%, versus a -12.09% rise in the benchmark S&P 500 index during the same period.

About the Author: Spandan Khandelwal

Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing. More...

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