Costco’s Fiscal 2022 Is Off to a Strong Start

We plan to lift our $391 per share valuation of wide-moat Costco COST by a mid-single-digit percentage, reflecting a stronger-than-expected first quarter (which ended November), featuring 9.8% adjusted comparable growth that outpaced our 6% estimate. Although our near-term targets should rise, our long-term forecast still calls for mid- to high-single-digit annual percentage revenue growth and adjusted operating margins approaching 4% over the next decade. While we believe Costco is among the strongest retailers from a competitive standpoint, we suggest prospective investors seek a more attractive entry point.

Costco posted $50.3 billion in first-quarter revenue, beating our $48.5 billion target as customers reacted to the retailer’s strong values amid an inflationary environment. The strong sales did not translate into cost leverage beyond our expectations; Costco’s operating margin of 3.3% matched our estimate and the prior year’s result, and we believe this reflects the rising cost environment and higher wages.

We are not surprised that Costco’s in-stock rate appears to be better than that of other retailers, considering its limited assortment (only around 4,000 stock-keeping units in store). Similarly, its purchasing leverage has been an asset in holding product costs down even as prices rise throughout the economy. We do not believe the inflationary environment poses a material challenge for Costco. On the contrary, its value-oriented assortment should be increasingly sought by customers, and other retailers’ price hikes should provide cover for Costco to do the same if necessary. Costco’s membership renewal rate in the United States and Canada hit 91.6%, up 30 basis points from an already stellar level in the prior quarter, and we believe the company also has ample room to raise its annual base membership fee from its current $60 annual mark in those countries (we forecast an increase in fiscal 2023).

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