Wholesale giant Costco is Monday's IBD Stock Of The Day. Costco stock is trading in a buy zone after its big earnings beat last week. Meanwhile, shares are flashing a highly bullish signal.
Costco defied the wider retail downturn by topping estimates for Q4 results last Tuesday. Earnings growth slowed after two quarters of accelerating gains. Adjusted earnings climbed nearly 16% to $4.86 per share adjusted, compared with an 18% gain the prior quarter. Total revenue grew 9.5% to $78.94 billion, ending a streak of decelerating growth for the past four quarters.
Analysts polled by FactSet expected Costco earnings to increase 14% to $4.79 per share. Revenue was seen climbing 7.8% to $77.72 billion.
Adjusted comparable sales, which exclude changes in gas prices and foreign currencies, rose 3.8%. U.S. comparable sales climbed 3.1%. Same-store sales in Canada increased 7.4%. Other international comparable sales rose 4.4%. However, e-commerce comparable sales fell 0.6% for the period.
In the earnings call, CFO Richard Galanti said increasing the price of Costco memberships "is a question of when, not if." The company last increased its membership fees in June 2017, with annual memberships costing $60 in the U.S. "You'll see it happen at some point," Galanti said. "We can't really tell you if it's in our plans or not."
Meanwhile, inventory shrink, which refers to retail theft, hasn't been as big of a problem for Costco as it has for other retailers. Galanti noted that inventory shrink increased "by a couple basis points" over the past several years, which Costco attributes to the rollout of self-checkout. Shrink increased by less than one basis point over the past year.
As for the recent consumer spending slowdown, Costco is seeing the biggest pullbacks in big-ticket discretionary items. The wholesaler is gearing up for the holidays and bringing in seasonal items early. Gaming products and Christmas-related items are "starting well so far," Galanti said.
Analyst Outlooks
Analysts broadly hoisted their Costco stock price targets following the earnings report.
Argus raised its price target to 650 from 630 on Friday and maintained a buy rating on the shares. Argus commended Costco management for focusing on long-term customer relationships and not increasing fees while U.S. consumers struggle with inflation, although some investors may have hoped for pricier memberships. Costco continues to stand out as a company with consistent growth and high relevance for value-conscious customers, Argus wrote.
Raymond James hoisted its price target on COST stock to 580 from 570 on Wednesday. The near-term outlook will likely remain choppy due to lingering economic concerns and consumer uncertainty, analyst Bobby Griffin wrote. However, Costco's long-term fundamentals remain intact. Raymond James kept its outperform rating on the shares.
Costco has the highest barriers to entry in retail due to its immense buying power and extreme value offering, as well as the potential for an eventual membership increase and special dividend, Truist analyst Scot Ciccarelli wrote on Tuesday. The company's value proposition continues shining and its margins "remain solid," despite a sales shift toward consumables, Ciccarelli said. Truist raised its price target to 619 from 597 and maintained its buy rating on Costco stock.
Deutsche Bank wrote in a Wednesday note that there was "little to pick at" in Costco's earnings, which were fueled by "best in class" traffic, strong retail margins and sequential core-on-core margin improvement. Costco remains well-positioned to take market share during the holiday season as customers prioritize value, according to Deutsche Bank. The firm lifted its price target on Costco stock by $1 to 652 and kept a buy rating on shares.
Costco Stock
COST stock ranks first in the Retail-Major Discount Chains industry group, according to the IBD Stock Checkup.
Shares rose 1.1% last week to reclaim their 50-day moving average and other key technical lines after Costco's earnings report.
Shares climbed 1.1% Monday to close just above the 571.16 buy point of a flat base. The current pattern formed next to a long, larger consolidation. Costco stock briefly eclipsed the entry on Sept. 28.
The relative strength line is at a 52-week high on a weekly chart, reflecting COST stock's strong outperformance vs. the S&P 500 index. The RS line hitting a new high before a breakout is highly bullish.
COST stock has a 91 Composite Rating out of a best-possible 99. The Composite Rating combines various technical indicators into one easy-to-read score. Shares have a 95 EPS Rating. Costco's relative strength line is at its highest level since February, giving the stock an 85 RS Rating.
Costco stock has rallied nearly 25% so far this year.
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