We all know Costco Inc. (NASDAQ:COST). Many of us love the crowds and bustling noise of a Costco shopping trip. Some of us, not so much. But whether we love it or not, all of us know the value of the low prices and quality products – the value proposition that is Costco. Similarly, those of us who know about Costco stock know that the beneficiaries of this value proposition include its shareholders.
After a long period of outperformance, is Costco stock still a buy?
Image source: Getty Images
Costco stock: A shining history
In the last 20 years, Costco’s stock price has rallied almost 2,000%! In the last 10 years, it’s rallied approximately 525%! As you can see from the price graph below, this performance was steady and consistent, which reflected Costco’s steady and consistent business.
Costco offers a well-diversified list of products, from food to clothes, to seasonal and essential household items. It’s a business model that stands resilient in recessionary times and can benefit fully in prosperous times. It’s no wonder that Costco’s stock price outperformed its peer group by a wide margin and places Costco in the category of best performers.
Strong business fundamentals
Turning to the numbers, Costco’s financial performance has benefitted from high sales volumes and rapid inventory turnover. Volume purchasing has resulted in operating efficiencies. This, along with efficient distribution and reduced handling of merchandise, has driven Costco’s profitability over the years.
In 2014, Costco had 663 warehouses in operation, 70% of them located in the U.S. Total revenue was $112 billion, of which 2% of that was from membership fees. In the latest full year, 2023, Costco had 861 warehouses in operation, 68% of them located in the U.S. and Puerto Rico. Total revenue was $242 billion, of which 1.9% was from membership fees.
Recent results
Costco’s latest quarter was incredibly strong on all fronts. Revenue increased almost 6%, driven by strong same-store sales growth across the board, with Canada coming in at 9%, international coming in at 8.2%, and e-commerce at 18%.
The company reported earnings per share (EPS) of $3.92 versus $3.30 last year, for a very strong 18% earnings growth rate, or 12.5%, excluding a special dividend. This was well above analyst expectations, which were calling for EPS of $3.62.
Costco’s future growth
According to management, demand in mature markets such as the U.S. remains strong. There’s still room for more locations as saturation is still a long way off. Costco is taking market share from other retailers as its value proposition has struck a chord among shoppers.
Its international business shows a lot of promise too as the engine for future growth. For example, Costco’s first location in Shanghai was opened in 2019. Recently, Costco opened its sixth store in China, in the city of Shenzhen – and the response from Chinese consumers was exhilaration, with long line ups and major crowds.
With a clear runway for continued growth of Costco warehouses internationally and the company’s proven business model, we can continue to expect good things from Costco stock. I mentioned in a prior article that I believe that the stock’s valuation is quite high and I would not buy it at this time. Having said that, the long-term outlook is very positive, in my view.
The bottom line
With Costco’s accelerating international expansion and continued domestic dominance, Costco stock is looking good for long-term investors.
