Costco’s Sales Rebound in May after a Weak April

Costco Wholesale’s (NASDAQ:COST) sales rose 7.5% YoY (year-over-year) to $12.55 billion in the four weeks ended May 31. The company’s comparable sales grew 5.4% YoY in May. Excluding the impact of currency headwinds and a change in gasoline prices, the comparable sales growth was 9.7%. Wall Street expected comparable sales of 4.5%.

Costco’s net sales recovered in May after falling 1.8% in April. Despite 85.7% e-commerce comparable sales growth, the company’s April comparable sales fell 4.7%. Lower traffic due to social distancing and stay-at-home mandates impacted the company’s sales in April.

Costco stock has risen 2.3% as of 9:58 AM ET today. Investors were relieved to see the sales recover in May.

Costco’s sales in May

Costco’s US comparable sales rose 5.5% in May. The comparable sales in Canada declined 0.9%, while the Other International segment delivered comparable sales growth of 12.0%. The company’s e-commerce comparable sales surged 106.2% in May. Many customers avoided going out and shopping at stores amid the pandemic.

Meanwhile, excluding the impact of currency fluctuations and a change in gasoline prices, the May comparable sales in the US, Canada, and Other international segments grew 9.2%, 4.9%, and 17.9%, respectively.

The company continued to face strong sales in foods and sundries and fresh categories. Also, non-food sales rebounded in May. Major appliances (including consumer electronics, sporting goods, and hardware) were among the better-performing departments. Softlines’ comps grew by low single digits. The sales in luggage, jewelry, and apparel were soft but improved compared to April.

However, the comps in the Ancillary businesses fell by the high 30s. The decline was mainly due to lower gasoline sales. Also, most of the company’s optical hearing aid and photo departments were closed initially. The departments started to reopen as the month progressed. Costco ended May with about 90% optical hearing aid and photo departments back in operation. However, the company stated that despite the reopening, sales volumes were still impacted negatively by COVID-19.

Do analysts see upside in Costco stock?

On May 28, Costco declared its results for the third quarter of fiscal 2020, which ended May 10. The company’s third-quarter net sales grew 7.3% to $36.45 billion, while the comparable sales grew 4.8%. The overall third-quarter revenue (including membership fee) grew 7.3% to $37.27 billion. The revenue beat analysts’ forecast of $37.13 billion. After a stockpiling trend in March, Costco and several of its peers experienced lower traffic amid the COVID-19 pandemic. Excluding fuel, Costco’s US comps grew 5.9% in the third quarter. In comparison, Walmart’s fiscal first-quarter US comps grew 10% due to larger purchases made amid lockdown fears.

Meanwhile, Costco’s third-quarter EPS declined about 8% YoY to $1.89 as COVID-19 related costs weighed on its earnings. The EPS missed analysts’ forecast of $1.95.

Several analysts are optimistic about Costco’s growth prospects. The company plans to enhance its online capabilities to support growing e-commerce sales. In March, Costco acquired Innovel Solutions to support the delivery of big and bulky items like furniture and appliances at a faster rate.

A strong membership renewal rate (91% in the US and 88.4% worldwide in the fiscal third quarter) also makes Costco attractive. The company offers merchandise to its members at very low prices by keeping thin margins. Competitive pricing amid challenging economic conditions might win the company more members.

As of May 3, the stock has risen 4.3% YTD (year-to-date). In comparison, Walmart stock has risen 3.9%, while Target stock has declined 5.1%. Analysts have an average target price of $323.71 for Costco stock, which implies an upside potential of about 6%.