Our macro team is calling for four more quarters of Quad 4, a favorable setup for Costco's share performance. Last week we added Costco to our Long list and today we presented our Black Book.
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CLICK HERE for the webcast replay and supporting materials. |
Food retailers benefited from the shift to at-home consumption during the pandemic. Just as COVID-19 restrictions were finally being lifted throughout the country and consumers were resuming their lives, food inflation and soaring gasoline prices have altered their behavior again. Costco's value proposition is positioned to gain share as consumers look to stretch their food budgets.
Our investment themes for the Black Book:
Our case for outperformance in Quad 4
With membership fees constituting slightly more than half of the operating profit, Costco's visibility in its growth projections is among the highest in our Consumables coverage universe. With that visibility comes a premium valuation. Costco's track record of positive annual shareholder returns is enviable. As seen in the following table, Costco's shares have only had negative returns in two years in the recent past. In both years, 2009 and 2016, the share price decline was driven by EPS declines due to weaker same-store sales. Despite the premium valuation, Costco's valuation multiple has not been behind the share price declines in recent history. That relationship exists because of Costco's earnings visibility and defensive business prospects. If the relationship continues to hold, positive same-store sales growth driven by mid-single digit growth in membership and mid to high-single digit growth in average price should anchor double-digit share price appreciation in Quad 4.
For more detail on the valuation, visibility, grocery sector dynamics, business background, and more download the presentation.