Shares of Costco Wholesale Corporation COST hit a 52-week high of $983 yesterday, highlighting investor confidence in the company’s business model and performance. This milestone reflects Costco's ability to thrive in a dynamic retail environment, driven by its unmatched value proposition and growing membership base.
However, as the stock reaches new highs, the question looms: Should investors hold on for more gains or lock in profits, given its elevated valuation?
Costco closed at $982.15 yesterday, just shy of its 52-week peak, reflecting a remarkable 48.8% gain year to date. The stock has outpaced its industry peers and the broader S&P 500 index, which have risen by 27% and 27.1%, respectively, in the said period.
COST Stock Year-to-Date Performance
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The stock’s slight pullback from the 52-week high could be due to some profit-taking. Nevertheless, technical indicators remain supportive of Costco’s strong performance. The stock is trading above its 50-day and 200-day moving averages, signaling robust upward momentum and price stability. This technical strength mirrors the positive market sentiment and investor confidence in Costco's financial health and long-term prospects.
Costco Trading Above 50 & 200-Day Moving Averages
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Decoding Potential Tailwinds Behind Costco’s Rally
Costco continues to deliver consistent value through its membership-based model, driving strong customer loyalty and recurring revenues. The company's commitment to offering quality goods at competitive prices resonates with consumers, especially in times of economic uncertainty. With a curated product selection, bulk purchasing power and an efficient supply chain, Costco remains a dominant player in the warehouse retail sector.
The company's growing customer base and impressive membership renewal rates further solidify its market position. Costco boasts high membership renewal rates, often exceeding 90%. Costco ended the final quarter of fiscal 2024 with 76.2 million paid household members, up 7.3% from the prior year. Executive memberships, a more profitable category for Costco, grew by 9.6% year over year to reach 35.4 million. We note that membership fees contributed $1.5 billion to the top line in the last reported quarter.
Costco’s global expansion remains another growth pillar. The company has been opening new locations in high-growth international markets. In fiscal 2024, the company opened a net of 29 new warehouses — 23 in the United States, five in international locations and one in Canada. With plans to add 29 warehouses, including three relocations in fiscal 2025, the company aims to enhance its market presence and drive top-line growth.
Costco's digital and e-commerce initiatives also continue to gain traction, contributing to overall sales growth. The company registered e-commerce comparable sales growth of 18.9% in the fourth quarter. Deliveries through Costco Logistics rose 29% year over year in fiscal 2024. As more consumers shift to online shopping, Costco is positioning itself to capture a greater market share.
How Do Estimates Measure Up for COST?
Reflecting the positive sentiment around Costco, the Zacks Consensus Estimate for earnings per share has seen upward revisions. Over the past 60 days, analysts have increased their estimates for the current and next fiscal years by two and seven cents to $17.75 and $19.36 per share, respectively. These estimates indicate expected year-over-year growth rates of 10.2% and 9%, respectively.
See the Zacks Earnings Calendar to stay ahead of market-making news.
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What May Pull Back Costco’s Momentum?
Costco's impressive sales figures are part of a larger retail picture where competition is intense. Rivals like Walmart WMT and BJ’s Wholesale Club BJ, which also cater to value-conscious consumers, are investing in expanding their e-commerce capabilities and enhancing customer experience. Amazon AMZN continues to dominate online shopping, pushing traditional retailers to innovate rapidly.
Also, underlying Inflationary pressures are causing consumers to be more judicious with their disposable income, affecting various merchandise categories and creating hurdles for retailers.
The aforementioned headwinds pose challenges to Costco's stock. Moreover, margins remain a critical area to monitor, with potential concerns stemming from any deleverage in the selling, general and administrative (SG&A) rate. In the last reported quarter, the company raised wages in the United States and Canada, which added pressure to its SG&A expenses.
Despite Costco's strong technical performance, there are concerns from a valuation perspective. The stock is trading at a significant premium to its peers. Costco's forward 12-month price-to-earnings ratio stands at 54.05, higher than the industry’s 31.71 and the S&P 500's 22.62. This suggests that investors may be paying a high price relative to the company's expected earnings growth. COST has a Value Score of D.
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Final Verdict on COST: Hold Tight or Take Profits?
Investors who believe in Costco’s long-term potential may find value in holding the stock, given its ability to navigate economic challenges, expand footprints and enhance offerings. However, if you are focused on short-term gains or are wary of the high valuation, taking profits at this level could be a prudent move. Costco currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Walmart Inc. (WMT) : Free Stock Analysis Report
BJ's Wholesale Club Holdings, Inc. (BJ) : Free Stock Analysis Report
Costco Wholesale Corporation (COST) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
