November sales results are in, and Costco Wholesale Corporation's COST performance has once again captured the attention of investors. With its well-established reputation for offering value and quality, Costco continues to be a dominant player in the ever-changing retail landscape. But in the wake of the latest sales report, the question arises: should you buy or hold Costco stock at this juncture? While Costco's sales growth in November remained positive, the rate of increase has slowed.
Unpacking Costco’s November Sales Figures
Costco’s business model, built on its membership-based structure, continues to fuel strong growth. The company benefits from high membership renewal rates, which provide a stable source of revenues, while its efficient supply-chain management and bulk purchasing power enable it to offer competitive prices. This combination of customer loyalty and operational efficiency allows Costco to maintain its edge.
For the four weeks ended Dec. 1, comparable sales in the United States grew 3.4%, while Canada and Other International markets saw increases of 3.7% and 1.3%, respectively. The total company comparable sales rose 3.1%. This follows consecutive increases of 5.1% and 6.7% in October and September, respectively. (Read: Costco Continues With Decent Comparable Sales Run in November)
However, Costco's e-commerce comparable sales fell by 3.1% or 2.5% when adjusted for gasoline prices and foreign exchange fluctuations. Management informed that e-commerce sales were hit by an estimated 15 percentage points as Thanksgiving, Black Friday and Cyber Monday took place a week later this year compared to last year. This hurt total and comparable sales by approximately one and one-half percent.
As a result, Costco's net sales for November increased 5.6%, reaching $21.87 billion, up from $20.71 billion in the same period last year. This follows a sales improvement of 7.2% and 9% reported in October and September.
Key Factors Behind Costco’s Growth
Costco continues to deliver consistent value through its membership-based model, driving strong customer loyalty and recurring revenues. Members pay an annual fee for access to Costco's warehouses, where they can purchase goods at significant discounts. The company benefits from substantial recurring revenues through membership fees, with renewal rates exceeding 90% in key markets such as the United States and Canada.
The membership fees contribute significantly to Costco’s bottom line. These fees act as a buffer against margin pressures from its low-priced product offerings, allowing the company to maintain profitability while keeping costs low. The annual fees range from $65 for Gold Star, Business and Business add-on memberships to $130 for Executive memberships. We note that membership fees contributed $4.83 billion to the top line in fiscal 2024.
Costco continually adapts to market trends and evolving consumer preferences. The company regularly refreshes its product offerings, balancing everyday essentials and unique, high-demand items. Through diligent market analysis and tailored product selections, COST has expanded its domestic and international presence.
In fiscal 2024, Costco opened 30 warehouses, including one relocation. The company has ambitious plans for fiscal 2025, aiming to add 29 locations, including three relocations. This expansion is designed to enhance its market footprint and drive top-line growth. The Zacks Consensus Estimate projects sales growth of 7.4% for fiscal 2025 and 6.5% for fiscal 2026, reflecting strong market confidence in Costco’s growth trajectory.
Competitive Landscape: Can Costco Stay Ahead?
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.
As the retail sector evolves, Costco must continue to leverage its unique strengths, including membership loyalty, bulk purchasing power and an efficient supply chain, to stay competitive. Moreover, the company’s strategy of opening new club locations while enhancing its e-commerce operations positions it to meet shifting consumer preferences.
Costco Looks Overvalued: Is Correction on the Horizon?
Costco stock has been a standout performer, with shares rallying 17% over the past six months, outpacing the industry's rise of 10%. This impressive growth underscores investor confidence in Costco’s business model.
Image Source: Zacks Investment Research
However, the stock is trading at a significant premium to its peers. Costco's forward 12-month price-to-earnings ratio stands at 54.55, higher than the industry’s ratio of 32.10 and the S&P 500's 22.82.
Image Source: Zacks Investment Research
Current stakeholders might consider taking profits or diversifying their portfolio, especially if they are risk-averse or have a short-term investment horizon. On the other hand, new investors should carefully assess the stock’s price relative to its growth prospects and overall market conditions before making a purchase. A correction, should it occur, could present a more attractive entry point for those looking to invest in Costco.
However, for those who believe in Costco’s continued strength, holding on to the stock with a long-term view may still make sense, provided they are prepared for short-term volatility.
Should You Invest in Costco Now or Wait for a Pullback?
Costco's resilient business model, strong membership renewal rates and strategic expansion plans highlight its solid fundamentals. While the recent slowdown in sales growth and premium valuation may deter aggressive buying, the company's steady performance and market leadership support a balanced perspective. With a Zacks Rank #3 (Hold), Costco stock is best suited for investors with a long-term outlook who can weather short-term fluctuations while awaiting clearer catalysts for future growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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