By Tonya Garcia, MarketWatch
Everyone has seen clips of customers flocking to Costco Wholesale Corp. to stock up on everything from food to toilet paper and other necessities.
Cowen analysts say that coronavirus-related surge in demand will continue for months.
“We believe Costco is well positioned to continue delivering double-digit earnings growth over the near to medium term driven by square footage growth, membership revenue growth, and industry leading physical store traffic growth,” wrote Cowen analysts in a Tuesday note.
Among the reasons for the upbeat view, besides the recent jump in demand, are the long-term investments that Costco /zigman2/quotes/201191698/composite COST +0.42% has made in things like e-commerce, the increase in memberships, and the solid state of Costco’s higher-income customer base.
Costco customers have average household income of about $74,000, Cowen said.
“[W]e do acknowledge many of these new members may cancel their memberships once the coronavirus passes, but nevertheless expect a lift in total members,” analysts wrote.
Even as stores struggle to keep some items in stock, Costco is able to shift to alternatives, particularly in categories like fresh food and domestic goods.
Cowen rates Costco shares outperform and, in a rare move these days, raised its price target to $360 from $350.
On Tuesday, Cowen lowered a slew of retail price targets, including off-price retailer Burlington Stores Inc. /zigman2/quotes/203203718/composite BURL +2.86% (down to $177 from $270), athletic retailer Dick’s Sporting Goods Inc. /zigman2/quotes/200566298/composite DKS +4.31% (down to $21 from $47) and luxury brand Ralph Lauren Corp. /zigman2/quotes/207257694/composite RL +5.48% (down to $88 from $152).
Analyst groups are optimistic about the mass merchant sector, with Instinet analysts moving up their estimates for retailers like Costco, Walmart Inc. /zigman2/quotes/207374728/composite WMT -0.45% , Target Corp. /zigman2/quotes/207799045/composite TGT +1.31% and BJ’s Wholesale Club Holdings Inc. /zigman2/quotes/203668982/composite BJ +1.67% in the current and next fiscal quarters.
“The sales lifts are partially offset by lower merchandise margins on our model due to a mix shift towards basics,” Instinet wrote.
“In addition, we give back some of the leverage associated with sales increases as we model higher payroll dollars due to the need to increase staffing. We have not changed our estimates for club memberships for BJ’s, Sam’s Club [Walmart’s membership club business] or Costco at this point, although all three could see some incremental membership sign ups.”
UBS analysts also think Costco will benefit from the recent $1 billion acquisition of Innovel Solutions, which is described as a “middle mile and final mile delivery and installation business.”
Analysts led by Michael Lasser think that Costco’s control of Innovel’s 11 distribution centers will help it to grow in the “big and bulky” categories like grills, mattresses and major appliances.
“Overall, we think this deal further enhances Costco’s strong position in the critical long-run competitive frontiers in retail: data and delivery,” UBS said.
“We suspect that it will also be able to use this infrastructure to ship parcel items to better serve its overall e-commerce business. Right now, in some cases Costco charges higher prices for big and bulky items online than it does in its stores to account for delivery expenses.
UBS rates Costco stock buy with a $355 price target.
Costco stock has gained 18.3% over the last year while the S&P 500 index /zigman2/quotes/210599714/realtime SPX +2.62% has slumped 13.7%.