Costco Stock Drops despite Q4 Earnings Beat but Analysts Remain Bullish

Costco (NYSE: COST) released its earnings for the fiscal year 2022 ending August 28 yesterday after the markets closed. While the big box retailer reported better than expected earnings in the quarter, the stock is trading lower in US premarket price action today.

Costco reported revenues of $70.76 billion in the fiscal fourth quarter which was 15.2% higher than the corresponding quarter last year. After adjusting for gasoline prices and foreign exchange fluctuation, the company’s sales rose 10.4% in the quarter.

In the full fiscal year, Costco reported revenues of $222.73 billion which was 16% higher than the previous fiscal year. On an adjusted basis also, revenues increased by 10.6%. Notably, it is the first time that Costco’s annual revenues have surpassed $200 billion. The metric was slightly ahead of what Wall Street analysts were expecting.

Costco reported an EPS of $4.20 in the fiscal fourth quarter while analysts were expecting the number at $4.19. In the fourth quarter of the fiscal year 2021, it reported an EPS of $3.76.

While Costco stock is trading lower after the earnings, Walmart stock had risen last month after it released its earnings for the fiscal second quarter of 2023. Its guidance was also not as bad as feared.

Costco Stock Drops Despite Earnings Beat

Notably, Walmart announced a price hike for its Sam’s Club by $5 to $50 for the basic offering and from $100 to $110 for the premium offering. Analysts were expecting Costco to also announce a membership fee hike.

However, Costco denied that it plans to increase membership prices in the near future. The company’s CFO Richard Galanti meanwhile said, eventually it would raise membership prices.

During the fiscal fourth quarter, Costco reported membership revenues of $1.32 billion while the full fiscal year revenues came in at $3.87 billion.

Notably, Costco’s earnings came in at a time when there are fears of a recession in the US. Even the Federal Reserve has acknowledged that its rate hikes might push the US economy into a recession. Fed chair Jerome Powell’s hawkish comments after the September meeting triggered a sell-off in US stocks.

Consumer spending on discretionary goods has especially been tepid. However, Costco managed to beat the slowdown blues due to higher sales of consumables.

Also, the membership-only chain mainly caters to affluent consumers which are not as impacted by the economic slowdown. The steep rise in food, gas, and rent prices has played havoc with the monthly budgets of several low-income households in the US.

Wall Street Analysts are Bullish on COST Stock

Wall Street analysts were bullish on Costco stock before the earnings release. Deutsche Bank reiterated COST as a buy earlier this week and raised its earnings estimates. There is a guide on how to buy stocks with credit cards.

While Costco’s earnings were better than expected, markets seem perturbed by the pressure on margins. COST’s gross profit margins fell in the quarter as the company battles with headwinds like higher freight and labor costs as well as global supply chain issues.

Other retail companies are also feeling pressure from high inflation. Higher inflation has also taken a toll on Amazon’s earnings in the first half of 2022. While US inflation has come down over the last two months, it is still way above what the Fed targets. There are however some investments that can outperform during inflation.

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Written by Mohit Oberoi

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