While the COVID-19 pandemic brought many retailers to their knees, Costco Wholesale (NASDAQ:COST) has reported strong sales growth for much of the past year. Consumers shifted spending toward Costco as they spent more time at home and looked to consolidate shopping trips.
Costco’s sales growth moderated beginning Thanksgiving week and continuing through the end of December. That caused some investors to worry that the warehouse club giant was losing its momentum. Costco dispelled that notion on Wednesday afternoon, reporting excellent sales results for the month of January.
A modest holiday slowdown
Costco’s adjusted comparable sales (excluding changes in gasoline prices and currency fluctuations) jumped nearly 17% in September and October, the first two months of the company’s 2021 fiscal year. Growth stayed strong in the first three weeks of November, but abruptly slowed to a mid-single-digit pace during Thanksgiving week. For the five-week retail month of December, adjusted comp sales rose 10.9%.
However, this slowdown shouldn’t have surprised investors. A number of states, cities, and countries implemented shopping restrictions last fall as COVID-19 case numbers skyrocketed around the world. Furthermore, the period between Thanksgiving and year-end tends to spark the highest retail traffic, magnifying the impact of store capacity restrictions. Finally, many retailers encouraged consumers to make their holiday purchases as early as October to avoid a crush of traffic between Black Friday and Christmas.
Sales growth bounced back in January
Sure enough, Costco regained its sales momentum as soon as the holiday period ended and the calendar flipped to 2021. For the four-week period ending on Jan. 31, comparable traffic returned to growth, including a solid 5.1% increase in the U.S. Adjusted comparable sales surged 15.7% year over year, with double-digit growth in most markets. Total sales grew 17.9% to $13.64 billion. Costco’s e-commerce sales more than doubled, compared to growth of approximately 62% in December.
Costco reported broad-based sales strength across all merchandise categories in January. Virtually all categories of food continued to sell extremely well. Furthermore, comparable sales surged 30% year over year in the hardlines department, driven by strong demand for seasonal merchandise, sporting goods, garden supplies, and big-ticket items (including electronics).
Notably, Costco achieved its strong January sales results even though sales for its ancillary businesses fell again. The pandemic has reduced gasoline demand and wreaked havoc on Costco’s popular food courts and its travel unit. The company’s ability to overcome the headwind from its ancillary business lines highlights the strength of demand within its core merchandise categories.
Don’t worry about tougher comparisons
During the company’s monthly recorded sales call on Wednesday afternoon, Costco executive David Sherwood noted that the retail giant will face tougher year-over-year comparisons beginning later this month. (Costco’s sales surged in the early days of the pandemic last year, as consumers stocked up on a wide variety of essentials.)
Investors shouldn’t worry, though. Considering Costco’s strong sales momentum, the company seems likely to report high single-digit comp sales growth even as comparisons get tougher for the next two months. (By contrast, growth could exceed 20% in April, when Costco will face a very easy year-over-year comparison.) As the pandemic fades over the next year, Costco’s ancillary businesses should recover, partially offsetting any headwinds in the core business.
Looking further ahead, Costco could benefit from lower costs once it can discontinue pandemic-related safety measures. It could also raise membership fees as soon as next year, boosting the bottom line by hundreds of millions of dollars annually. (It last increased membership fees in 2017 and tends to boost them every five to six years.)
Costco stock certainly isn’t cheap. It currently trades for more than 35 times the company’s estimated earnings for fiscal 2021. But considering the company’s deep moat, excellent sales trends, and long-term margin expansion potential, Costco stock looks like a great choice for long-term investors.
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