Costco Stock Has Grown 2x S&P 500 This Year. What’s Next?

Note: Costco FY’24 ended on September 1, 2024.

Warehouse club operator Costco (NASDAQ: COST) stock is up 52% since the beginning of this year, almost 2x the return of the S&P 500 over the same period. In comparison, Costco’s peer Walmart’s (NYSE: WMT) stock has swelled about 80% over the same period. So what’s happening with Costco stock? 

Costco reported earnings and intraday is up 1.5% near $1000 per share. Costco beat both on top and bottom lines in its fiscal first quarter, which ended November 24. The retailer reported $4.04 (up 13% year-over-year) in earnings per share on $62.15 billion (up 8% y-o-y) in revenue. The market was anticipating $3.79 and $62.08 billion, respectively. Comparable sales for the total company (and U.S.) increased 5.2% y-o-y. Traffic rose 5.1% globally and 4.9% in the U.S. In addition, the company’s average ticket was up 0.1% worldwide and 0.3% in the U.S., including the negative impact of gas deflation and foreign exchange rates. 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. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Despite the pandemic and inflationary pressures, the business has grown strongly. 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 Q1, membership fee income of $1.2 billion was 8% higher than the prior-year period. This quarter marked the full impact of the 8.3% fee increase which took place on September 1, 2024.  The cost of a premium membership increased to $130 from $120 and the maximum annual 2% reward for its executive membership rose to $1,250 from $1,000. Also, the annual charge for its basic membership fee grew to $65 from $60. Costco usually increases its membership fees every five years and the last hike was seen in 2017. Inflation over the past two years may have contributed to the seven-year gap this time.

Admirably, COST stock has generated better returns than the broader market in each of the last 3 years Returns for the stock were 52% in 2021, -19% in 2022, and 49% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

The retailer ended the first quarter with 77.4 million paid household members, up 8% y-o-y, and 139 million cardholders, up 7%, with continuing growth throughout the previous quarters. In terms of renewal rates, at the Q1 end, its U.S. and Canada renewal rates were 92.8%, down 0.1% from the Q4 end. The worldwide rate came in at 90.4%, also down 0.1%. The company’s renewal rates are seeing some impact from higher growth in digital sign-ups, which renew at a slightly lower rate than the base as a whole. A 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. 

We have revised COST’s valuation to $973 per share, based on a $18.07 expected EPS and a 53.9x P/E multiple for the fiscal year 2025 – slightly below the current market price. We forecast COST’s Revenues to be around $273 billion for the fiscal year 2025, up 7% y-o-y. The stock’s current valuation at 54 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. 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.