Shares of Costco (NASDAQ:COST) have been an absolute tear in the last two decades, easily outpacing the broader markets. Since May 2004, Costco stock has returned over 2,000%. After adjusting for dividend reinvestments, these returns are much higher at 2,980%. Valued at a market cap of US$336 billion, Costco is among the largest big-box retailers in the world and remains positioned for growth. Let’s see why.
Costco has a unique business model
Unlike other retailers such as Walmart and Target, Costco generates more than 50% of its operating income via membership fees. It ended the fiscal second quarter (Q2) of 2024 with 73.4 million paid household members, up 7.8% year over year, while the number of cardholders rose by 7.3% to 132 million.
Costco members pay the company an annual fee, allowing the retail giant to enjoy a stable stream of recurring revenue. This high-margin business enables Costco to lower product prices and transfer a significant portion of these benefits to consumers, providing it with a competitive moat. With a renewal rate of 90%, Costco’s membership program enjoys strong customer satisfaction in several global markets.
During Costco’s Q2 (ended in February) earnings call, Chief Financial Officer Richard Galanti explained that 150 of its locations in the U.S. generate more than US$300 million in sales, of which 40 locations bring in over US$400 million annually.
Costco is part of a recession-resistant sector, and its growth story is far from over. In 2024, it plans to open 28 new locations globally, a majority of which will be in the United States. A growing store count should translate to a higher membership count and revenue for Costco, allowing it to drive sales and earnings higher over time.
Moreover, Costco is poised to benefit from the secular shift toward online shopping. The retailer expects its wide portfolio of lower-priced products to keep attracting customers online and offline, which has led it to expand its presence from 638 warehouses to 875 warehouses in the last 11 years.
How did Costco perform in fiscal Q2?
In Q2 of 2024, Costco reported revenue of US$58.44 billion and adjusted earnings of US$3.92 per share. Comparatively, Wall Street forecast revenue at US$59.16 billion and earnings at US$3.62 per share in Q2. In the year-ago period, Costco reported revenue of US$55.27 billion and earnings of US$3.30 per share.
Costco missed top-line estimates despite reporting strong e-commerce sales during the holiday quarter. The company explained that snack foods and beverages drove sales growth, as revenue in this category was up by mid-single digits in Q2.
In fiscal 2023, Costco’s gross margins narrowed as the company was forced to sell a higher mix of lower-margin food items amid inflation. However, in the last six months, its gross margins have expanded as e-commerce sales have grown by more than 18% year over year.
Further, Costco last raised its membership fees in 2017 and is likely to hike these fees in the near term, which should further boost profit margins and offset headwinds such as inflation.
Priced at 44 times forward earnings, COST stock is quite expensive despite its expansion plans, improving margins, and resilient business model.
