Inflation Hits 2.7% – Here’s Why This Retail Giant Could Soar or Crash

Retail stocks tremble as inflation claws to 2.7% – but one player's defying gravity.

The inflation squeeze playbook

When prices rise, consumers pivot. Discount chains feast while luxury brands sweat. This isn't economics—it's survival of the thriftiest.

2.7%: The magic number that moves markets

Not catastrophic, not comforting. The Fed's favorite pain gauge just flashed amber. Cue the analyst downgrades (and the usual Wall Street overreactions).

Why this retailer's different

Private-label dominance? Check. Supply chain armor? Check. A CFO who actually understands inflation hedging? Priceless.

Watch the next earnings call. Either they'll boast about 'pricing power' or blame 'macro headwinds'—Wall Street's favorite get-out-of-jail-free cards.

Image source: Getty Images.

How inflation is affecting Costco

Costco's differentiated business model helps protect the retailer from inflation in some ways. First, because of its membership model, Costco's business isn't as sensitive to consumer prices as peers likeandmight be.

In fact, the company makes a large percentage of its profit from membership income. Its customers pay a base price of $65 a year for the privilege of buying its bulk goods at NEAR cost. The profit it makes from retail sales is comparable to what it makes from membership income. In its most recent quarter, for example, it generated $1.24 billion in membership income, which made up nearly half of its $2.53 billion in operating income.

Since Costco enjoys a substantial membership-based revenue stream, inflation is less of a risk for the company as that membership income should be protected from inflation. Additionally, its customers have already paid to be able to shop there in part because of Costco's low prices.

Costco's pricing strategy, which is made up of selling bulk goods near cost and private-labeling brand-name products under its Kirkland label, arguably gives the company an advantage in an inflationary environment. Because of Costco's reputation for low prices, price-conscious consumers may be more likely to shop there when they're worried about high prices at other retailers.

In its annual report, Costco acknowledged: "Inflationary factors such as increases in merchandise costs may adversely affect our business, financial condition, and results of operations. We may not be able to adjust prices to sufficiently offset the effect of cost increases without negatively impacting consumer demand."

Is Costco a buy if inflation goes up?

Based on its membership model, reputation for low prices, and economies of scale, Costco seems better positioned than most retailers in an inflationary environment.

Looking back at 2022 could offer a good example of Costco's performance in an inflationary environment. In that year, Costco's performance essentially matched the, with the stock falling 19.6% against the S&P 500's decline of 19.4%.

However, in fiscal 2022, which ended on Aug. 28, 2022, Costco posted impressive comparable sales growth, up 10.6% after adjustments for foreign currency and fuel prices. Earnings per share also ROSE 17% that year. Costco's results were similarly strong in the fourth quarter of 2022, even when inflation was peaking, with adjusted comparable sales up 10.4%.

This offers some evidence that Costco's business should be able to thrive in an inflationary environment. However, the stock could face pressure if the broad market pulls back, as it already trades at a high price-to-earnings ratio of 54, and expensive stocks tend to get hit harder in market sell-offs.

Given that valuation, Costco seems likely to follow the broad market lower on any macroeconomic worries. However, investors should rest assured that the business is resilient enough to handle another spike in inflation.