Costco (NASDAQ:COST) has been a solid investment for the past decade. The retailer’s membership-only, bulk purchasing model has rewarded growth investors richly. Over the past five years, that’s amounted to a 205% return for COST stock. The performance is even more impressive given that COST has been down over 9% so far in 2022. The pullback on Costco shares lasted for most of January, where the price of shares dropped to their October 2021 levels.
But now the discounted price is catching the eye of investors.
There are concerns about issues like inflation and rising interest rates. Both could cut into consumer spending while also raising costs for retailers like Costco. However, one of those challenges could also be a win for Costco — I’ll explain that shortly.
Overly cautious investors may look at the economic landscape combined with January’s pullback as a reason to hold off on COST stock despite its tempting price. I’m more inclined to side with InvestorPlace contributor Joel Baglole who recently wrote that “if you’re in it for the long term, COST stock is almost always a buy.”
Inflation, Interest Rates Pose Challenges for Retailers
Retailers like Costco have had to absorb considerable costs as a result of the pandemic. This includes expenses like supplying PPE for employees. They have also had to deal with logistical challenges resulting from the global supply chain disruption, along with rising transportation costs. Despite these issues, Costco shares have performed extremely well. Between the stock market crash in 2020 and the end of 2021, COST stock was up by 95%.
Costco shares have been caught up in the broader market selloff that saw many stocks hit through January amid concern over issues like inflation and rising interest rates.
While those two factors spooked investors in general, for Costco they actually have particular significance. As a retailer, Costco could be directly impacted by consumer spending trends.
The company has already warned about rising food costs. Inflation is not only hitting food prices, it’s also making big-ticket items Costco sells (like TVs and appliances) more expensive. It adds pressure to raise employee wages. A rise in interest rates is likely to result in consumers buckling down on borrowing for those big-ticket extras.
Rising interest rates and inflation do have a potential to hurt Costco. They are key reasons why risk-adverse investors may not want to add Costco to their portfolio at this time, despite the current COST stock discount.
But Inflation Is Also An Opportunity for Costco
While inflation is certainly something to be wary of, in the case of Costco, don’t overlook the possibility that it will also have an upside.
When food prices rise, consumers often buy in bulk to cut their costs. Because of its required membership fee, Costco already skews toward customers who are in a better financial position than many other grocery stores. In its most recent quarter (reported last December), Costco not only saw big increases in net sales (despite inflation), the company also added another 800,000 paying members, bringing its total to 61.7 million households.
In short, inflation means some grocery retailers are likely to feel the effect of consumers cutting their food budgets in 2022. Costco stands a good chance of seeing its business getting a boost.
Bottom Line on COST Stock
The economic issues coming into play could end up becoming headwinds for COST stock. That’s always a possibility. However, I think the more likely outcome is inflation becoming a net win for Costco, with COST stock kicking back into growth mode.
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