3 Costco Analysts React To Q3 Earnings, Shrinking Margins, Potential Membership Fee Increase

Costco Wholesale Corporation COST shares closed higher by 1.24% on Friday after the retailer reported impressive sales growth but shrinking margins in a challenging macroeconomic climate.

On Thursday, Costco reported fiscal third-quarter adjusted EPS of $3.04 on revenue of $52.60 billion. Both numbers beat consensus analyst estimates of $3.03 and $51.76 billion, respectively. Revenue was up 16.2% from a year ago.

Costco reported 7.4% e-commerce sales growth and 16.6% U.S. sales growth in the quarter. Same-store sales were up 14.9%, beating analyst expectations of 11.1%.

Costco also said its gross margin dropped 0.99% to 10.1% due to inflation, supply chain disruptions, and other rising costs.

Related Link: Gap Analysts React To Mixed Q1 Earnings: 'Disappointed, But Not Surprised' 

Voices From The Street: Credit Suisse analyst Robert Moskow said Costco's general merchandise sales held up relatively well in the third quarter compared to Walmart Inc WMT and Target Corporation TGT, and he expects a membership fee hike will help support margins.

"Sales growth was 'broad-based' with home furnishings, apparel, bakery, deli, and tires all out-performing," Moscow wrote.

Bank of America analyst Robert Ohmes said membership renewal rates hit a record 90% worldwide for the first time.

"COST has seen first-year renewal rates in the high-60% to low-70% range depending on the country, which is up from historical levels in the high-50% to low-60% range," Ohmes wrote.

Telsey Advisory Group analyst Joseph Feldman said Costco is executing well in a difficult environment for retailers.

"In FY23, Costco should continue to generate double-digit EPS growth, driven by an MSD comp, HSD membership fee income growth, healthy digital growth, and effective management of costs," Feldman wrote.

Ratings And Price Targets:

• Credit Suisse has a Neutral rating and a $500 target.
• Telsey Advisory Group has an Outperform rating and a $590 target.
• Bank of America has a Buy rating and a $605 target.
• Photo via Wikimedia Commons