Costco Wholesale Corporation, the warehouse club giant, has experienced a remarkable surge in its stock price, rising 52% since the beginning of the year and significantly outpacing the S&P 500. This performance, while impressive, is overshadowed by its competitor Walmart, whose stock has soared by approximately 80% over the same period. Costco’s recent fiscal first-quarter results, ending November 24, 2024, further solidified its strong position. The company exceeded market expectations on both revenue and earnings per share, reporting $62.15 billion in revenue and $4.04 earnings per share, representing year-over-year increases of 8% and 13%, respectively. This robust performance was driven by strong comparable sales growth of 5.2%, increased traffic both globally and domestically, and a slight increase in average ticket size, even considering the dampening effects of gas deflation and foreign exchange fluctuations. Costco’s consistent revenue growth and its focus on enhancing the customer experience underscores its adaptability and resilience in the dynamic retail landscape. The company continues its expansion with new store openings in the U.S. and strategic international growth, particularly in the Chinese market.
A key factor contributing to Costco’s success is its membership-based business model. Unlike traditional retailers heavily reliant on sales, Costco derives a significant portion of its profits from membership fees. In the first quarter, membership fee income climbed 8% year-over-year to $1.2 billion, reflecting the full impact of a fee increase implemented on September 1, 2024. This marked the first fee increase since 2017, with the cost of a premium membership rising to $130, the maximum annual reward for executive members increasing to $1,250, and the basic membership fee reaching $65. While inflationary pressures over the past two years likely contributed to the longer-than-usual gap between fee increases, the revenue generated from memberships provides a stable foundation for Costco’s profitability and allows the company to offer competitive pricing on its merchandise.
Costco’s stock has consistently outperformed the broader market in recent years. Despite a dip in 2022, the stock delivered substantial returns of 52% in 2021 and 49% in 2023. While these impressive gains highlight the stock’s growth potential, they also underscore its volatility. In contrast, diversified portfolios like the Trefis High Quality Portfolio, which holds a collection of 30 stocks, demonstrate less volatility and have consistently outperformed the S&P 500 over the same period. This exemplifies the principle of diversification in mitigating risk and achieving more consistent returns.
The growth in Costco’s membership base further reinforces its strong position. The company ended the first quarter with 77.4 million paid household members and 139 million cardholders, representing year-over-year increases of 8% and 7%, respectively. While renewal rates experienced a slight dip in both the U.S. and Canada, and globally, this can be attributed to the growth in digital sign-ups, which tend to have lower renewal rates than traditional memberships. Maintaining high renewal rates is crucial for Costco as it ensures a stable revenue stream from membership fees and increases the lifetime value of each customer, ultimately boosting overall profitability. Therefore, monitoring renewal rates remains a key aspect of evaluating Costco’s long-term growth prospects.
Looking ahead, Costco’s valuation has been revised to $973 per share, based on a projected earnings per share of $18.07 and a price-to-earnings (P/E) multiple of 53.9x for the fiscal year 2025. This valuation is slightly below the current market price, suggesting a potential for either a price correction or continued growth in earnings to justify the current valuation. Revenue is forecasted to reach $273 billion in fiscal year 2025, reflecting a 7% year-over-year increase. The stock’s current P/E ratio of 54x is significantly higher than the pre-pandemic range of 25x to 30x. This elevated valuation presents two possible scenarios: a potential decline in share price if the market corrects itself or a period of oscillation as earnings grow to catch up with the current valuation, potentially exacerbated by any broader market downturn.
Several factors contribute to Costco’s continued positive outlook. Persistent inflationary pressures on food prices benefit warehouse club retailers like Costco, as they offer cost savings to consumers. Costco’s recent foray into selling gold and silver further diversifies its offerings and provides an attractive investment option for its members. The company’s competitive pricing strategy for precious metals, coupled with cash back rewards for executive members and Citi cardholders, enhances the value proposition for its members. Furthermore, analyzing Costco’s performance relative to its peers provides valuable insights into its competitive positioning within the retail landscape. By comparing key metrics across industries, investors can gain a comprehensive understanding of Costco’s strengths and identify potential opportunities for growth.
