Costco Wholesale Corporation (COST - Get Rating) is scheduled to report its first-quarter (ended November 2023) results on December 14, 2023. In this piece, I have discussed why it could be prudent to wait for a better entry point in the stock.

COST’s EPS and revenue for the first quarter are expected to increase 10.2% and 6.1% year-over-year to $3.42 and $57.77 billion, respectively. In the last quarter, the company beat the consensus EPS and revenue estimates by 0.9% and 1.3%, respectively. Its comparable sales rose 1.1% year-over-year. In the U.S., comparable sales rose just 0.2%. Excluding changes in gas prices, comparable sales rose 3.8% overall and 3.1% in the U.S.

Although shoppers returned to the membership club for groceries in the previous quarter, spending on discretionary items remained muted. COST’s average transaction or ticket was down 3.9% worldwide and 4.5% in the U.S., impacted by weakness in bigger ticket non-foods discretionary items and gas price deflation.

The company ended the fourth quarter with 71 million paid household members, rising 7.9% year-over-year, and cardholders stood at 127.9 million, up 7.6% year-over-year. The company finished fiscal 2023 with 23 new net locations with stores in China, Japan, and Australia.

For four weeks ended October 29, 2023, net sales were $18.53 billion, increasing 4.5% year-over-year. Similarly, September’s (five weeks ended October 1, 2023) net sales rose 6% year-over-year to $22.75 billion. It had plans to open 10 new stores during the first quarter of fiscal 2024, with nine in the U.S. and one in Canada.

COST’s stock has performed well, rising 32.4% over the past nine months and 36.7% year-to-date to close the last trading session at $623.86.

Here’s what could influence COST’s performance in the upcoming months:

Robust Financials

COST’s total revenue for the fourth quarter ended September 3, 2023, increased 9.5% year-over-year to $78.94 billion. Its operating income rose 11.4% over the prior-year quarter to $2.78 billion. The company’s net income attributable to COST increased 15.6% year-over-year to $2.16 billion. Also, its EPS came in at $4.86, representing an increase of 15.7% year-over-year.

In addition, its membership fees rose 13.7% year-over-year to $1.51 billion.

Favorable Analyst Estimates

Analysts expect COST’s EPS for fiscal 2024 and 2025 to increase 10.6% and 9.3% year-over-year to $15.66 and $17.11, respectively. Its fiscal 2024 and 2025 revenue is expected to increase 4.7% and 6.8% year-over-year to $253.76 billion and $270.92 billion, respectively.

Mixed Valuation

In terms of forward EV/EBITDA, COST’s 23.50x is 112.3% higher than the 11.07x industry average. Likewise, its 1.07x forward Price/Sales is 7.9% higher than the 1.16x industry average.

On the other hand, in terms of forward non-GAAP P/E, COST’s 38.99x is 122.2% higher than the 17.55x industry average. Its 3.89x forward non-GAAP PEG is 65.6% higher than the 2.35x industry average. Likewise, its 29.51x forward EV/EBIT is 97.1% higher than the 14.97x industry average.

Mixed Profitability

In terms of the trailing-12-month Return on Common Equity, COST’s 27.54% is 135.7% higher than the 11.68% industry average. Likewise, its 9.12% trailing-12-month Return on Total Assets is 88.7% higher than the industry average of 4.83%. Furthermore, the stock’s 3.64x trailing-12-month asset turnover ratio is 335.7% higher than the industry average of 0.84x.

On the other hand, COST’s 1.78% trailing-12-month Capex/Sales is 44.6% lower than the 3.22% industry average. Likewise, its 2.60% trailing-12-month net income margin is 47% lower than the 4.90% industry average. Furthermore, the stock’s 3.51% trailing-12-month EBIT margin is 58.2% lower than the industry average of 8.40%.

POWR Ratings Reflect Uncertainty

COST has an overall rating of C, equating to a Neutral rating in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. COST has a C grade for Value, consistent with its mixed valuation.

It has a C grade for Quality, which syncs with its mixed profitability. Its 0.77 beta justifies its B grade for Stability.

COST is ranked #26 out of 38 stocks in the Grocery/Big Box Retailers industry. Click here to access COST’s Growth, Momentum, and Sentiment ratings.

Bottom Line

Macroeconomic challenges have been putting pressure on COST’s top line as consumers pull back spending on big-ticket and discretionary items. However, holiday sales are expected to be robust and will likely aid its top and bottom-line growth in the first quarter.

The resumption of student loan repayments and rising credit card debt will keep discretionary spending under pressure in the near term. Moreover, investors have been anticipating a membership fee hike as it has been more than six years since the last hike, but the management has so far declined to specify when the hike will take place.

Given its mixed valuation and profitability, it could be wise to wait for a better entry point in the stock.

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

COST has an overall POWR Rating of C, equating to a Neutral rating. You may check out the stocks within the Grocery/Big Box Retailers industry possessing an A (Strong Buy) or B (Buy) rating: Ryohin Keikaku Co., Ltd. (RYKKY - Get Rating), Marks and Spencer Group plc (MAKSY - Get Rating), and Jerónimo Martins, SGPS, S.A. (JRONY - Get Rating). To access more Buy-rated Grocery/Big Box Retailers stocks set to outperform, click here.

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COST shares were trading at $628.05 per share on Tuesday morning, up $4.19 (+0.67%). Year-to-date, COST has gained 38.62%, versus a 22.16% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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