Costco Continues to be the Right Stock for the Right Time

• Costco’s January sales results are confirmation that the pandemic was just the beginning.
• The warehouse club allows consumers to buy the brand names they want and avoid trading down.
• Investors will want to ensure that the company’s renewal rate remains high, particularly if they increase the annual fee.
• With an uncertain economic outlook, Costco is a good option for investors looking for a place to hide out.

It’s a month before Costco Wholesale (NASDAQ:COST) reports earnings. But it’s a good time to check in on what investors should expect. The company announced its January sales results on February 1, 2023, confirming what many investors already expected. That is, consumers continue to like Costco.

In the four-week retail month starting on January 2, Costco reported total sales of $16.84 billion. That was an increase of 6.9% from the prior year. Comparable-store sales in the U.S. were also up 6.6%. The only number that saw a year-over-year decline was the company’s e-commerce segment.

Not to worry, the company reported a 5% increase in-store traffic. That confirms that brick-and-mortar retail may not be dead...if it’s the right store. And Costco looks like the right store.

Consumers Don’t Have to Trade Down

One strategy that consumers are engaging in to combat inflation is the idea of trading down. This means they are buying a store’s private-label brands over their preferred (perhaps) brand names.

The alternative to that approach is to shop at warehouse clubs like Costco or BJs Wholesale Club Holdings (NYSE:BJ). This allows consumers to buy brand names in bulk quantities at lower per-unit costs.

That serves to amplify the narrative that the pandemic was a beginning for Costco not a one-time event. Certainly, the company benefited from the pandemic. Memberships rose as consumers sought to maximize their shopping efforts' efficiency. Buying in bulk just made sense.

But some analysts thought sales would slip as the economy reopened. But that hasn’t happened. And even as inflation has climbed, Costco continues to post strong revenue and earnings numbers, which are being bolstered by a strong retention rate.

This makes sense. Once you’ve committed to the membership at a warehouse club, it almost doesn’t make sense not to shop there.

The One Number to Watch

Costco has not raised its membership fee since June 2017. The company has a history of increasing that fee every four and a half years. That means it’s likely to announce an increase at any time.

The hike is likely to only increase by $5 per year. But it will be worth watching if consumers are willing to bear the cost. Layoffs are increasing across all sectors. And there’s growing evidence that wages will be the next shoe to drop. This presents a question that only time can answer.

Will consumers trim their budgets wherever they can decide that their membership at Costo is not needed? Or will they decide that the savings they can get from Costco offset the membership cost?

I’d bet on the latter, particularly since the membership ties into gas perks. But it’s still something for investors to watch.

Is COST Stock a Buy

The analysts tracked by MarketBeat say Costco is a Moderate Buy and give it an upside of about 7%. I agree for now. It’s an expensive stock based on its valuation, but investors seem to have a lot of patience with it.

And I’m not sure if the broader market will do much better than the low single digits, particularly if the economy worsens. Costco fits into that category of best-in-class stocks that make sense to hide out during times like these. And with a dividend that pays you $3.60 per share annually, you get a little extra for your patience.

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