Costco Earnings Reveal Shocking State of Economy

Membership-driven consumer wholesale seller Costco (NASDAQ:COST) recently released its first set of earnings for FY2023.

 

In addition to providing insights about the company’s performance, these earnings results may offer some glimpses into the economy at large going into the new year.

 

Here’s what Costco’s earnings could reveal about the state of the economy in 2023.

 

In the most recent quarter, Costco reported net sales of $53.44 billion, up 8.1 percent from the 49.42 billion reported in the same quarter last year. Net income rose to $1.364 billion from the previous year’s $1.234 billion. This resulted in EPS of $3.07, compared to $2.98 in the same quarter of 2021.

Although Costco improved both its revenues and profits over the past year, last quarter’s results fell somewhat short of analyst expectations. The consensus EPS estimate for Costco was $3.12 per share, while revenue was estimated at $58.36 billion. Shares fell slightly in after-hours trading once the results were released, but the decline was modest.

 

One other interesting facet of Costco’s earnings report that bears reviewing is the decrease in online sales. While overall same-store sales rose 6.6 percent year over year, online sales declined by more than 3 percent. These results somewhat challenge the conventional wisdom that consumers are increasingly making purchases from legacy retailers via eCommerce channels.

 

Making economic predictions based on earnings reports is always an inexact science, but there are some interesting takeaways for investors from Costco’s results.

 

First and foremost, the steady increase in same-store sales and overall revenues suggests that consumers are gradually changing their behaviors to adjust for inflation. Costco’s bulk sales model allows customers to spend less on groceries and household necessities, making it a favorite recession-resistant stock for many investors.

 

Falling online sales may suggest that retailers like Costco have overestimated the long-term staying power of pandemic-era consumer behaviors.

 

While many consumers started ordering online and picking purchases up on a curbside basis in 2020 and 2021, these habits could be falling away in the post-pandemic era.

 

Although eCommerce will almost certainly remain above pre-pandemic levels, evidence such as the decline of online sales at Costco suggests that growth in this area may be stalling out for the time being.

 

Costco’s valuation metrics may also give some indication of how the investment world is viewing the upcoming year.

 

At the time of this writing, Costco’s forward price-to-earnings ratio was 33.81. Apple, Alphabet and Microsoft, meanwhile, were trading at 22.86, 19.76 and 26.03 times forward earnings, respectively.

 

Next year, however, Costco is only expected to grow by 10 percent. As such, it seems investors are currently putting a premium on stability and safety at the expense of growth. This fact likely indicates a bearish attitude going into 2023.

A final insight to take away from Costco’s earnings is the fact that inflation and high fuel prices are still taking a toll on large, profitable sellers of consumer staples.

 

Falling margins have caused Costco’s earnings to grow at a substantially slower rate than revenue. While inflation is expected to ease in 2023, there could still be tough times ahead for many companies.

 

When combined together, these insights provide a somewhat dreary picture of the economy as we enter 2023. Rising costs are likely to remain a factor for both businesses and consumers.

 

As a result, there’s a good chance that the Federal Reserve will be forced to continue its program of interest rate hikes. Consumers will likely save their money for essential purchases, driving growth down and potentially contributing to a mild recession.

 

Although none of this is guaranteed, Costco’s results may be an early sign of weak consumer confidence and lackluster economic growth in 2023. This roughly lines up with projections from economists showing higher chances of both a US and a global recession next year.

 

JP Morgan predicts that inflation will ease to 3.2 percent by the end of 2023, but the first few months of next year are still likely to see high rates of cost increases. Retailers are also expecting a slow holiday season, potentially supporting the idea of weaker consumer spending in 2023.

 

These conclusions beg the question of whether Costco could be a safe haven for investors going into next year. As noted above, the stock is generally considered resistant to both inflation and recession risks. This could make Costco a go-to stock in a year marked by both of these phenomena.

 

Costco’s reasonable debt-to-equity ratio of 0.30 could also provide it with a degree of insulation from the effects of higher interest rates in 2023.

 

Analysts expect Costco stock to perform moderately well next year, with the median target price now 13.8 percent above the current trading price.

 

The stock carries a consensus buy rating, with 17 of the 34 analysts covering it rating Costco as a buy. No analysts currently rate Costco lower than a hold, suggesting that it could be relatively safe over the coming 12 months.

 

Costco could also be a decent choice for a difficult year due to its ability to produce dividend income. While the stock only yields 0.75 percent at today’s prices, the dividend payout ratio is under 30 percent. As such, Costco will likely have no trouble maintaining or raising its dividend in the event of a recession next year.

 

Investors who plan to hold the stock for the long run could also see significant dividend appreciation as management continues to increase the annual payout.

 

Taking these factors into account, Costco could be a good choice for conservative investors who are concerned about an economic downturn next year.

 

While the company likely won’t grow as quickly as the large tech firms, it also isn’t likely to contract much in the event of weak economic performance. Costco also has the potential for slow, steady growth over the long term.

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