Costco Q3 Results and Forecasts
Last week, Costco Wholesale announced May sales results. The company reported net sales of 15.59 billion, an increase of 24% from last year.
Although Q3 results beat estimations, the slowdown of e-commerce growth increases the concern for some investors.
In my opinion, the current price is reasonable, with limited upside potential.
Valuation:
From the DCF model, the year-end target price range is around $ 370 to $410. LTM P/E and forward P/E are 39x and 35x, higher than the peer group average. Costco’s stock price is more expensive than other retail companies.
Financials:
Historically, the MoM % growth of sales in June is strong. I assume a conservative 17% MoM growth in June and an average MoM% in July and August. Forecasted net sales in Q4, 2021 annual revenue, and 2021 EPS would be 57.68 billion, 192 billion, and $10.79, respectively.
Opportunities and Uncertainty:
- According to the latest earnings call, inflation causes pressure on Costco’s gross margin, but the decreased incremental wages related to COVID have offset that impact.
- Instead, a permanent $1 an hour wage increase was implemented during Q3.
- Combining those impacts, the % gross margin in 2021Q3 increase 22 basis points from 2021 Q2 but is lower by 35 basis points from last year.
- The slowdown of online sales growth may raise investors’ concerns and reduce Costco’s current high valuation multiple.
- With the recovery from COVID, the growth of the higher-margin nonfood category will keep strong in the summer, and the travel business will improve soon. No need to be pessimistic about Costco’s gross margin.
- Costco usually raises the membership fees every 5 years by $5. It is likely the membership fees will be raised from $60 to $65 in 2022.
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