Costco Wholesale's (NASDAQ: COST) stock rallied nearly 80% over the past three years as the S&P 500 advanced about 30%. The warehouse retailer outperformed the market as it impressed investors with its consistent growth and resistance to economic headwinds.
But can Costco stay ahead of the market over the next three years? Below is a review of its business model, expected growth rates, and valuations so you can decide.
Image source: Getty Images.
What happened to Costco over the past three years?
Costco leverages its scale to buy and sell its products at much lower prices than many other brick-and-mortar retailers. It also encourages its customers to make bulk purchases of products to save money.
It can afford to sell its products at such low margins because it's a members-only warehouse club that generates most of its profits from its higher-margin membership fees. It also consistently opens more warehouses to reach new shoppers.
Therefore, Costco's core business will remain healthy as long as it grows its comparable-store sales, gains new members, maintains high renewal rates, and keeps opening new warehouses. Here's what happened over the past three fiscal years.
|
Metric |
Fiscal Year 2022 |
Fiscal Year 2023 |
Fiscal Year 2024 |
|---|---|---|---|
|
Adjusted* comps growth |
10.6% |
5.2% |
5.9% |
|
Total cardholders |
118.9 million |
127.9 million |
136.8 million |
|
Worldwide renewal rate |
90.4% |
90.4% |
90.5% |
|
Total warehouses |
838 |
861 |
891 |
Data source: Costco. Chart by author. *Excludes fuel and currency exchange variences. Latest fiscal year ended on Sept. 1, 2024.
Costco also raised its membership fees for the first time in seven years this September. Those higher fees should counter inflation, offset the company's logistics costs for its e-commerce business, and support its recent wage hikes in the U.S. and Canada.
What will happen to Costco over the next three years?
In fiscal 2025, Costco plans to open 29 new stores (including three relocations), with 12 new stores for the U.S. market. It also expects to start recognizing the benefits from its higher membership fees in the second half of the year.
From fiscal 2024 to fiscal 2027, analysts expect Costco's revenue to grow at a compound annual growth rate (CAGR) of 7% as its earnings per share (EPS) rise at a CAGR of 10%. That stable outlook suggests it will remain an evergreen investment as it continues to grow its comps, lock in new members, and open new stores.
By comparison, analysts expect Walmart -- which competes against Costco with its Sam's Club warehouses -- to grow its revenue and EPS at a CAGR of 5% and 17%, respectively, from fiscal 2024 to fiscal 2027 (which ends in January 2027).
Does Costco deserve its premium valuation?
Costco's core business looks healthy, but its stock is richly valued at 56 times this year's earnings. Walmart trades at 40 times this year's earnings, while its smaller warehouse rival, BJ's Wholesale, trades at just 25 times this year's earnings.
The bulls will argue that Costco deserves its premium valuation because it has a wide moat, it's well-insulated from macro and competitive headwinds, and it will keep growing at a steady rate for the foreseeable future. The bears will argue that Costco's valuations were inflated by a flight toward safe-haven stocks over the past few years, as well as the market's recent rally in anticipation of lower interest rates. Costco's low forward dividend yield of 0.5% also won't attract any serious income investors.
Is it the right time to buy Costco's stock?
Costco is a reliable long-term investment, but it's priced for perfection right now. Investors can gradually accumulate Costco's stock today but shouldn't be surprised if it gets a bit cheaper during a market downturn over the next three years.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $348,112!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $46,992!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $495,539!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of December 9, 2024
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
