What’s Next for Costco Stock?

Note: Costco FY’22 ended on August 28, 2022.

After a 12% increase year-to-date (YTD), at the current price of around $506 per share, we believe Costco (NASDAQ: COST), a warehouse club operator – is fairly priced. COST stock has increased from around $453 to $506 YTD, outperforming the broader indices, with the S&P growing about 8% over the same period. The company’s stock traded higher as it is raising its quarterly dividend from $0.90 a share to $1.02 a share, an increase of 13%. Costco now boasts 18 consecutive years of dividend increases. The company’s latest dividend hike provides some reassurance that business is as usual.

It is worth pointing out that despite the pandemic and inflation, the business has managed to grow strongly. Consumers loaded up on essentials in high quantities to keep costs low. However, Costco’s March 2023 sales data pointed to a potential slowdown for the business – with total comparable sales down 1.1% year-over-year (y-o-y), and e-commerce down 12.7% y-o-y. This marks the first time in multiple years that comps declined for the company, largely driven by rampant inflation. A year ago, the company reported overall comps growth of 17%, and nearly 9% growth in e-commerce. Now that the company’s monthly sales growth looks to be falling, investors might need to brace for potentially softer quarters ahead. The recent decline might be alarming but Costco makes a majority of its profits from its membership income, so comparable sales growth isn’t as important for it as it is for other retailers. In the latest Q2, membership fee income was 6.2% higher than the prior-year period. And the renewal rate remained strong, at 92.6% in the U.S. and Canada and 90.5% worldwide. We need to keep an eye on this metric when calculating Costco’s long-term growth potential. Also, Costco currently boasts nearly $14 billion in cash, cash equivalents, and short-term investments. Its long-term debt is only $6.5 billion, so Costco has a net cash position on its balance sheet. 

We have revised COST’s valuation to $508 per share, based on a $14.52 expected EPS and a 35.0x P/E multiple for the fiscal year 2023 – almost in line with the current market price. We forecast COST’s Revenues to be around $245 billion for the fiscal year 2023, up 8% y-o-y. The stock’s current valuation at 36 times earnings is much higher than the 25 to 30 P/E range before the pandemic, which means investors could see a couple of scenarios play out. There is the possibility that the shares could decline until the valuation falls in line, especially if a recession sinks the broader stock market. Alternatively, the stock may oscillate as earnings grow and valuations catch up.

It is also helpful to see how its peers stack up. Check out how COST’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

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[1] Month-to-date and year-to-date as of 4/24/2023
[2] Cumulative total returns since the end of 2016