Up 8% This Year, Why Is Costco Stock Outperforming?

Note: Costco FY’23 ended on August 27, 2023.

After an 8% increase so far this year, at around $716 per share, we believe Costco (NASDAQ: COST), a warehouse club operator – is fairly priced. COST stock has increased from around $650 to $720 year-to-date, outperforming the broader indices, with the S&P growing about 6% over the same period. Costco has shown a consistent performance at driving revenue, coupled with its dedication to enhancing customer experience, reflecting its ability to thrive in the ever-changing retail landscape. Several club stores have been opened in the U.S. and the company is well-positioned for continued growth overseas, including in China. In Q2’24 (ended February 18, 2024), Costco repurchased 240k shares for $160 million. The retailer paid out their $15/share special dividend in Jan 2024. In addition, the company’s management also increased the recurring quarterly dividend by 13% (from the prior dividend of $1.02) to $1.16/share. 

COST stock has seen extremely strong gains of 90% from levels of $375 in early January 2021 to around $715 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in COST stock has been far from consistent. Returns for the stock were 51% in 2021, -20% in 2022, and 45% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that COST underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Consumer Staples sector including WMT, PG, and KO, and even for the megacap stars GOOG, TSLA, and MSFT.

It is worth pointing out that despite the pandemic and inflation, the business has grown strongly. In its most recent Q2, the company’s revenues grew by 6% year-over-year (y-o-y) to $57 billion, driven by a 4.8% increase in comparable sales, adjusted for gas prices and currency exchange, and 28% growth in eCommerce. It should be noted that 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 Q2, membership fee income was 8% higher than the prior-year period. Costco is likely due for a membership fee hike this year, which means its basic membership fee will go from $60 to $65 a year and its executive membership will go from $120 to $130. The retailer ended the second quarter with 73.4 million paid household members, up 8% y-o-y, and 132 million cardholders, up 7%, with continuing growth throughout the previous quarters. The renewal rate remained strong, at 92.9% in the U.S. and Canada, while the worldwide rate came in at 90.5%. This high renewal rate not only ensures a steady stream of revenue from membership fees but also increases the lifetime value of each customer, thereby boosting overall profitability. We need to monitor this metric when calculating Costco’s long-term growth potential. The company’s net income for the second quarter was $1.7 billion, or $3.92/share compared to $1.5 billion, or $3.30/share a year ago. Also, Costco currently boasts nearly $10.3 billion in cash, cash equivalents, and short-term investments. Its long-term debt is only $7 billion, so Costco has a net cash position on its balance sheet. 

We have revised COST’s valuation to $726 per share, based on a $16.20 expected EPS and a 44.8x P/E multiple for the fiscal year 2024 – in line with the current market price. We forecast COST’s Revenues to be around $254 billion for the fiscal year 2024, up 5% y-o-y. The stock’s current valuation at 47 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.

High inflationary pressures on food still burden consumers, so retail companies like Costco will benefit as cost savings are passed to customers – as evidenced in the latest March sales report. Costco reported net sales of $23.5 billion for the retail month of March, an increase of 9.4% from $21.46 billion last year. Costco also began selling gold in August 2023 and silver in late January of this year. The company prices the product attractively, providing members gold at ~2% above spot prices before a 2% cash back reward for executive members and another 2% cash back for those with the Citi card.

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.