There are a few undeniable certainties. The sun rises in the East, the sky is blue, and seemingly, everyone loves shopping at Costco.
The company's knack for delighting customers with new products and services at cut-rate prices has boosted growth, resulting in a steady string of increasing quarterly sales and profits.
It appears likely that the winning streak will continue.
Costco unveiled its latest monthly sales update on April 10, and the results were undeniably good. Management seemed impressed enough by the performance to revamp its stock dividend, leading analysts to reset stock price targets and outlooks.
Inflation takes a toll on consumer spending
Inflation wasn't much of a problem during 2020. The world was mired in the Covid pandemic, and economies were shaken by shutdowns, leading to tepid price increases as demand faltered. U.S. Gross Domestic Product fell by a third in the second quarter of 2020, causing retailers like Costco to become ghost towns.
Related: Costco has an answer for Sam's Club's expansion plan
Since then, the story has been much different. The Federal Reserve embraced a zero-interest rate policy, and Congress enacted broad-based stimulus to re-spark economic growth.
This one-two punch arguably worked too well.
GDP rebounded in the third quarter of 2020 and stayed strong throughout 2021. The bounceback provided tinder for inflation that got lit when the Ever Given freighter grounded in the Suez Canal, throwing supply chains into disarray.
Inflation quickly spiraled, peaking near 9% in June 2022. It took a toll on budgets, forcing consumers to ratchet back consumer discretionary spending to cover necessities.
Unfortunately, it hasn't gotten much better for shoppers.
To crimp inflation, the Fed has embarked on the most restrictive policy of rate hikes since Volcker smashed inflation in the early 1980s. This has caused credit card, auto loan, and mortgage rates to surge, further taxing consumers.
Costco rides a consumer cost-cutting wave
Consumers don't spend much time scrutinizing receipts during good times, but they sure do during tough times. Their recent cost-consciousness has hurt many retailers, but it's been a boon for Costco.
Membership at the warehouse chain has climbed because shoppers want to save money by buying in bulk.
Related: Costco enters a controversial industry with its latest move
In its last fiscal quarter (ending February), revenue improved by 5.7% and profit swelled by 12% to $3.71 per share partly thanks to growth in high-margin membership fees.
For perspective, national retail sales at all retailers grew by 2.1% during that three-month span, according to the U.S. Census Department.
Costco's outperformance is impressive, but retail sales growth can be impacted by new stores (Costco opens over 20 new stores per year, historically) and, in the case of some retailers like Costco, gasoline prices.
Therefore, a better apples-to-apples measure of its retail strength is comparable (comp) sales growth, which reflects year-over-year sales growth at stores open for at least one year.
Costco's strength on that measure is also notable. Its comp sales increased 5.6% in the February quarter, suggesting new stores aren't the driving force behind its increasing revenue. Instead, it's due to more members spending more money.
"We ended the second quarter with 73.4 million paid household members, up 7.8% versus last year, and 132.0 million cardholders, up 7.3%," said Costco CFO Richard Galanti on the company's conference call. "Our average transaction or ticket was up three-tenths of a percent worldwide and one-tenth of a percent in the US."
Based on Costco's latest monthly update, its business appears to be strengthening.
Costco's revenue rose 9.4% year-over-year in March, including new stores and gas sales, to nearly $21.5 billion, and its comp store sales were up a very healthy 7.5%. Easter holiday sales boosted comp sales, but only by about a half-percent.
Analysts revamp Costco stock forecasts
Following the March numbers, Wall Street analysts reset their outlooks.
Roth MKM's Bill Kirk noted that March's results accelerated from February, leading him to boost his Costco stock price target to $650 from $601. The increase is sizable, but Kirk's target is still south of Costco's $732 share price on April 11.
Related: Costco makes a huge change to a signature food item
Kirk's downbeat price target stems from thinking Costco is richly-valued. Its shares currently trade at a forward price-to-earnings ratio of 45. That's considerably higher than Walmart, owner of Sam's Club, which has a forward P/E ratio of 25, and BJ's Wholesale Club, a pure-play rival warehouse club, which has a forward P/E of 20.
DA Davidson's $680 price target is also below current share prices. However, it said March delivered the best core comp growth since January 2023, excluding the holiday-driven month of December.
Loop Capital's $820 price target is more optimistic. However, that's down from $830 because of worry that sticky inflation could mean this is as good as it gets for comp sales growth.
Evercore ISI called Costco's March numbers "a banner performance," upping its price target by $10 per share to $805 and maintaining an Outperform rating.
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Costco also drew praise from Chris Versace, portfolio manager of TheStreet Pro's real-money portfolio.
He called the results a "knockout," particularly given that Costco management also announced it is increasing its shareholder dividend by 13.7% to $1.16 per share.
"While there was some benefit because of the Easter holiday, even on an adjusted basis the sales increase confirms consumer wallet share gains," said Versace. "Costco continues to expand its warehouse footprint, which in turn drives its high-margin membership fee revenue stream. Exiting last month, the company had 876 warehouses with 69% in the U.S."
Versace also points out that Costco "doubled the number of warehouse locations in China to six this past March," and its e-commerce revenue continued to shine.
"Arguably the most surprising comp sales figures were for Costco’s e-commerce business, which climbed 28% year over year, on top of a tough double-digit comp of 14.5% a year ago," said Versace. "We expect overall digital shopping figures in the March Retail Sales report to be strong on the back of Amazon’s (AMZN) 'Big Spring Sale' event."
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