The past few months have been a roller coaster ride for shares of big-box retailer Costco (NASDAQ:COST). COST stock saw a series of peaks and troughs over the past few weeks, eventually settling roughly 10% lower than its February highs.
While that’s not much compared to some stocks which are down more than 20%, the weakness in Costco stock offers a buying opportunity. The firm looks poised to weather the storm and thrive well beyond it.
Coronavirus Boosts COST Stock
When the stock market crashed back in March, many people flocked to discount retailers like Costco, who saw their stores overwhelmed with panic-buyers. Of course, that surge of demand was temporary, but that doesn’t mean it won’t continue to create value.
Analysts at UBS pointed out that consumers are likely to continue with some of the shopping habits they formed during the coronavirus pandemic. Stocking up on necessities, perhaps not at the same rate they did in March, is likely to continue for the foreseeable future. Plus, it will take time for families to return to restaurants, meaning grocery sales will see stronger demand for at least the remainder of the year.
This week Costco revealed that April sales were down 1.8% as social distancing orders kept people from visiting the stores. But the biggest takeaway from the firm’s update was the fact that online traffic rose significantly following the lockdowns.
While that’s certainly to be expected as people stay at home, Costco’s online sales rose by nearly 86%. That kind of increase is likely to continue as a tailwind beyond lockdown according to Moody’s analyst Charlie O’Shea, who noted that the coronavirus pandemic is pushing Costco members to become more comfortable with buying online.
A Beacon of Hope in Retail
There’s no doubt that retail is going to struggle in the near-term even as more economies start to open around the U.S. That’s because coronavirus has accelerated the trend toward online shopping, something many firms weren’t prepared for.
But Costco is unique when it comes to grocers. Although the firm has been building out an online presence, its customers don’t seem to mind coming in to browse. Part of that is likely the ‘treasure hunt’ feeling they get from seeing Costco merchandise, and part could be the firm’s ultra-cheap gas prices.
Another huge advantage that Costco has over its rivals is its membership program. At first glance, it may seem that asking customers to pay for the privilege of shopping in Costco stores isn’t an ideal model with a recession on our doorstep. But Costco members are fiercely loyal, which has helped the company maintain a renewal rate of roughly 90% for the past few quarters. That’s in large part because Costco sells its goods essentially at-cost to consumers, guaranteeing them the best rate without shopping around.
Costco Appeals in a Recession
With that in mind, COST stock makes for a good defensive play with an economic downturn on the horizon. Costco is well-known for offering deep discounts and people are unlikely to give that up when times are tight.
Consumers appear to be tightening the purse strings because of the looming uncertainty that coronavirus has created, and that’s going to be a boon for retailers like Costco. Not only that, but according to Costco’s Chief Financial Officer Richard Galanti, customers have become increasingly willing to try-out Costco’s private label brand, Kirkland.
Selling more Kirkland products is great for Costco for a few reasons. First of all, it’s more money in Costco’s pockets, because they’re owned and operated by the firm itself. Perhaps more importantly, though, is the fact that customers are trying out items they may have skipped in the past. That will hopefully lead to repeat purchases, even after the economy improves.
Not only does that mean better margins for Costco, but it gives people yet another reason to continue shopping at the store.
The Bottom Line
With just 10% shaved off its share price and market uncertainty still casting a shadow over investors’ confidence right now, COST stock does carry some risk. But saying that, the firm is likely to be one of the first to make a full recovery, and then some.
If Costco is able to continue the momentum that it’s online arm has gained and keep customers renewing their memberships, the stock will probably never be this cheap again.
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