With a $226.87 billion market cap, Costco Wholesale Corporation (COST) operates membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Taiwan, and internationally.

Amid a challenging macro environment, the retailer continued to post healthy profits. The company achieved top-to-bottom line growth in the first quarter of fiscal 2023. During the quarter, COST reported revenue of $54.44 billion, up 8.1% year-over-year. Also, its operating income increased 3.4% from the prior-year period to $1.75 billion, while net income attributable to Costco was $1.364, an increase of 3% year-over-year.

Although COST’s business remained resilient despite heightened inflation, it has been dealing with a slowdown. The company reported revenue growth of 17.8% in fiscal 2021 and 16.1% in fiscal 2022 (ended August 28, 2022). Revenue increased 8.1% year-over-year in the most recent quarter (ended November 30, 2022). And in the month of January, revenue was up just 7.5% compared to January last year.

According to the Consumer Price Index (CPI) report released this Tuesday, inflation increased by 0.5% from the prior month in January and 6.4% from the same period in 2022. Both numbers exceeded the economists’ expectations of 0.4% and 6.2%, respectively. Higher-than-expected inflation could result in lower discretionary spending, affecting COST’s profits in the coming quarters.

Furthermore, the stock is currently trading at a premium to its industry peers. In terms of forward non-GAAP P/E, COST is trading at 35.17x, 82.6% higher than the industry average of 19.26x. The stock’s forward EV/EBITDA multiple of 20.60 is 11.5% higher than the industry average of 79.64. Also, its forward Price/Book of 10.40x is 315.4% higher than the industry average of 2.50x.

Shares of COST have gained 4.6% over the past month to close the last trading session at $511.28. However, the stock declined 6.3% over the past six months. The stock is currently trading 16.5% below its 52-week high of $612.27, which it hit on April 7, 2022.

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

Robust Financials

COST’s revenue increased 8.1% year-over-year to $54.44 billion for the fiscal 2023 first quarter ended November 20, 2022. The company’s operating income grew 3.4% year-over-year to $1.75 billion. Its income before income taxes came in at $1.77 billion, an increase of 4.4% year-over-year.

Furthermore, net income attributable to Costco was $1.36 billion, compared to $1.32 billion in the year-ago period, while net income per common share attributable to Costco was $3.07, up 3% year-over-year. Also, as of November 20, 2022, the company’s current assets stood at $34.15 billion, compared to $32.70 billion as of August 28, 2022.

Favorable Analyst Estimates

Analysts expect COST’s revenue for the second quarter (ending February 2023) to come in at $55.58 billion, indicating an increase of 7.1% year-over-year. The consensus EPS estimate of $3.22 for the ongoing quarter indicates a 10.1% year-over-year increase. Moreover, the company surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.

COST’s revenue and EPS for the current fiscal year (ending August 2023) are expected to grow 7.4% and 7.8% from the previous year to $243.80 billion and $14.31, respectively. In addition, analysts expect the company’s revenue and EPS for the next fiscal year to come in at $259.30 billion and $16, indicating an improvement of 6.4% and 11.8% year-over-year, respectively.

Mixed Profitability

In terms of the trailing-12-month gross profit margin, COST’s 12.05% is 61.8% lower than the 31.53% industry average. And its trailing-12-month EBITDA margin of 4.18% is 62% lower than the industry average of 10.98%. Also, the stock’s 2.55% trailing-12-month net income margin is 36.2% higher than the industry average of 3.99%.

However, COST’s trailing-12-month ROCE, ROTC, and ROTA of 29.47%, 16.21%, and 8.91% compare to the industry averages of 10.40%, 6.17%, and 3.60%, respectively. Likewise, the stock’s trailing-12-month asset turnover ratio of 3.55x is 325% higher than the 0.84x industry average.

POWR Ratings Show Uncertainty

COST has an overall rating of C, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. COST has a C grade for Quality, in sync with its mixed profitability. Also, it has a C grade for Stability. The 24-month beta of 1.10 justifies the Stability grade.

COST is ranked #27 out of 39 stocks in the A-rated Grocery/Big Box Retailers industry. Click here to access COST’s Growth, Momentum, Value, and Sentiment ratings.

Bottom Line

Popular retailer COST’s revenue has grown at a 14.3% CAGR over the past three years, while its net income and EPS have increased at CAGRs of 16.4% and 16.2%, respectively. Although the company’s business remained resilient amid a challenging macro environment, it might witness a slowdown due to high inflation.

Higher-than-expected January inflation data indicates that consumers could pull back on discretionary spending in the near term, thereby affecting COST’s profits. Given its higher-than-industry valuation and declining growth, it could be wise to wait for a better entry point in this retail stock.

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

COST has an overall POWR Rating of C, equating to a Neutral rating. Check out these other stocks within the Grocery/Big Box Retailers industry with an A (Strong Buy) rating: George Weston Ltd. (WNGRF), Caseys General Stores, Inc. (CASY), and Ingles Markets Inc. CI A (IMKTA).

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COST shares were unchanged in premarket trading Thursday. Year-to-date, COST has gained 12.19%, versus a 8.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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