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Costco's (COST) Business Model, Pricing Power Are Key Strengths

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 the 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 increasing penetration of e-commerce business. Cumulatively, these factors have been aiding Costco in registering impressive sales numbers.

Net sales increased 16.9% to $18.23 billion for the retail month of May, the four-week period ended May 29, 2022, from $15.59 billion in the last year. This followed an increase of 13.9% in April and 18.7% in March. Impressively, comparable sales for the retail month of May jumped 15.5%. This followed increases of 12.6% and 17.2% in April and March, respectively.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Costco has been rapidly adopting the omni-channel 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. This allows 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, has 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 U.K., Mexico, Korea, Taiwan, Japan, and Australia. We note that comparable e-commerce sales rose 6.3% in May. This followed increases of 5.7% and 8.9% in April and March, respectively.

Wrapping Up

Costco is focused on ramping up investments in the wake of rising competition. We believe that its business model, as well as its commitment toward opening membership warehouses, and providing convenient and affordable ways to shop, will continue to drive traffic and, in turn, revenues. Shares of this currently Zacks Rank #3 (Hold) player have appreciated 13.9% in the past year against the industry’s decline of 8.7%.

3 Stocks Looking Red Hot

We have highlighted three better-ranked stocks, namely Dollar Tree DLTR, Sysco Corporation SYY and United Natural Foods UNFI.

Dollar Tree, which operates discount variety retail stores, carries a Zacks Rank #1 (Strong Buy) at present. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Dollar Tree’s current financial-year sales and EPS suggests growth of 6.7% and 40.5%, respectively, from the year-ago reported numbers. DLTR has an expected EPS growth rate of 15.5% for three-five years.

Sysco Corporation, which is engaged in the marketing and distribution of various food and related products, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 9.1%, on average.

The Zacks Consensus Estimate for Sysco Corporation’s current financial year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the year-ago period. SYY has an expected EPS growth rate of 11% for three-five years.

United Natural Foods, one of the premier grocery wholesalers delivering the widest variety of fresh, branded, and owned brand products, carries a Zacks Rank #2 (Buy) at present. UNFI has a trailing four-quarter earnings surprise of 29.9%, on average.

The Zacks Consensus Estimate for United Natural Foods’s current financial-year sales and EPS suggests growth of 7.2% and 4.9%, respectively, from the year-ago reported numbers.


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