Wall Street praises Costco as 'best-in-class' retailer following strong September sales

Published Thu, Oct 6 20225:16 PM EDT

Wall Street responded favorably to Club holding Costco 's (COST) September sales figures, proving yet again why the company is the Club's top retail pick. Costco on Wednesday reported net sales of $21.46 billion for September, a 10.1% increase year-on-year. Unlike other publicly traded companies, Costco releases monthly sales reports in addition to quarterly earnings results, providing a regular metric on how the company's global business is performing. Costco's stock closed up 0.45%, at $482.49 a share, on Thursday. Analysts were largely encouraged by Costco's accelerating revenue for September, a sign it continues to deliver consistent top-line growth. "Costco in particular has been outperforming with consumers. They basically are a great way to save money for the middle-, upper-income consumer. They've won a lot of traffic and members the last few years and they seem to be sticking with Costco now as things start to slow," Greg Melich, an analyst at Evercore ISI, told CNBC . The Street view Costco's total company comparable sales, also known as same-store sales, were up 8.6% in September, excluding the impact from gasoline- and foreign exchange price changes. In a research note Wednesday, Stifel said that sales figure was a beat on the consensus estimate of a 7.2% rise, calling Costco a "best-in-class" retailer. In a separate note, Baird analysts described this growth as "healthy," albeit below the retailer's prior 6-month average growth rate of 9.6%. Meanwhile, analysts at DA Davidson said Costco's strong U.S. comparable sales rise of 8% in September beat their forecast of a 6% uptick. As a result, DA Davidson said it expects total company comparable sales for the fiscal first quarter of 2023 to now increase by 7.1%, up from a prior estimate of 6.5%. The strong sales results come amid inflationary pressures that have contributed to rising retail prices for consumers. But Costco has largely been able to manage inflation without passing on too much of the burden to consumers. Inflation for food and sundries in September was mostly consistent with that of August, while fresh food inflation was down on a year-on-year basis, analysts at JPMorgan wrote in a note Wednesday. That's a testament to Costco's business strategy of partnering with vendors to mitigate price increases. CEO Craig Jelinek even called the retailer the "price police" in a recent interview with CNBC. For September, global traffic to Costco stores increased 4.7%, while climbing just 2.6% in the U.S., given a slight negative impact from Hurricane Ian, according to the analysts at Baird. This was a moderation from August's uptick in traffic, at 5.6% globally and 2.9% in the U.S. But this metric remains solid when compared to the retail sector overall, the analysts argued. At the same time, the retailer's membership trends "have never been stronger," according to Baird. Costco's membership renewal rate came in at an all-time high of 92.6% in its fiscal fourth quarter . Management has opted out of increasing membership fees for the time being, which allows the company to attract new customers and take more market share in the competitive retail space. The Club take We continue to see Costco as a high-quality, recession-resistant retailer that can deliver earnings in a tough market. We think Costco will be a standout retailer in varying economic climates, but especially now as the retailer looks to pass along value to customers through competitive pricing in a period of heightened inflation. Contrast this with other big retail players that are struggling in a weaker macro environment with bloated inventories. Costco has several competitive advantages compared to its retail peers that allows it to keep prices down, including control over its inventory through its own production channels and partnerships with vendors. Furthermore, unlike other retailers, Costco sells fuel. Gasoline sales were one of the stronger business segments last quarter. Costco benefitted from higher gas prices earlier this year, which helped offset foreign exchange headwinds. Costco's gross margins have been under slight pressure due to inflation, but this has been offset by the retailer's strong membership numbers and durable top-line growth. We continue to be impressed by Costco's loyal customer base, as renewal rates exceed expectations and are at record-high levels. Principally, Costco has maintained its profitability and a strong balance sheet, two fundamental characteristics we look out for in high-quality companies. Shares of Costco are down 14% year-to-date but are outperforming the S & P 500, which is down 20%. We rate Costco a 1, which is a buy at current price levels. Costco's October sales will be announced Nov. 2. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) 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A shopper loads a car with bottled water at a Costco Wholesalers in Chingford, Britain March 15, 2020.

John Sibley | Reuters