Costco (COST) Rides on Business Model and Pricing Power

Costco Wholesale Corporation COST continues to be one of the dominant warehouse retailers based on the expanse and quality of merchandise offered. The company's distinctive membership business model and pricing power set it apart from traditional players. Amid the surging inflation, low-to-middle-income consumers have preferred discount stores over conventional retailers.

This Issaquah, WA-based company stands to benefit from its ability to draw traffic via strategic pricing, a robust membership model and the increasing penetration of the e-commerce business. Cumulatively, these factors have been aiding Costco in registering impressive sales numbers.

Net sales increased 10.1% to $21.46 billion for the retail month of September from $19.50 billion last year. This followed an increase of 11.4% in August and 10.8% in July. Comparable sales for September jumped 8.5% following increases of 10.1% and 10% in August and July, respectively.

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Costco is gradually adopting the omnichannel mantra to provide a seamless shopping experience. To drive its online sales, the company launched grocery delivery services in collaboration with Uber Technologies in July 2021. These services allow members to get their on-demand groceries delivered within hours through Uber and Uber Eats mobile apps.

Also, Costco’s acquisition of Innovel Solutions, a leading provider of third-party end-to-end logistics solutions — now called Costco Logistics, boosted its e-commerce capabilities and enabled it to sell "big and bulky" items.

The company has been gradually expanding its e-commerce capabilities in the United States, Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan and Australia. We note that comparable e-commerce sales rose 0.7% in September. This followed increases of 3.9% and 10.2% in August and July, respectively.

Wrapping Up

Inflationary pressure across a range of products is pinching consumers, who are now flocking to discount stores to cope with the same. The strategy to sell products at discounted prices has helped industry players, such as Costco, draw customers who have been seeking both value and convenience amid rising prices.

We believe a growing customer base and high renewal rates should fuel sales. The Zacks Consensus Estimate for Costco’s current financial-year sales and EPS suggests growth of 8.4% and 10.2%, respectively, from the year-ago reported numbers.

In the past year, shares of this Zacks Rank #3 (Hold) company have appreciated about 4.4% against the industry’s decline of 4.6%.

3 Stocks Looking Red Hot

Here we have highlighted three better-ranked stocks, namely Ulta Beauty ULTA, Dillard's DDS and Kroger KR.

Ulta Beauty, which operates as a retailer of beauty products, sports a Zacks Rank #1 (Strong Buy). Ulta Beauty has a trailing four-quarter earnings surprise of 32.8%, on average. ULTA has an expected EPS growth rate of 13.9% for three to five years. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Ulta Beauty’s current financial-year sales suggests growth of 13.7% from the year-ago reported number.

Dillard's, which operates retail department stores, carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of nearly 215%, on average.

The Zacks Consensus Estimate for Dillard's current financial-year sales suggests growth of nearly 4.8% from the year-ago period.

Kroger, which operates as a grocery retailer, currently carries a Zacks Rank #2. Kroger has an expected EPS growth rate of 11.7% for three to five years.

The Zacks Consensus Estimate for Kroger’s current financial-year revenues and EPS suggests growth of 7.8% and 10.3%, respectively, from the year-ago reported figures. KR has a trailing four-quarter earnings surprise of 15.7%, on average.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.