Skip to Content
Stock Analyst Update

Leading Competitive Edge Keeps Costco Solid

We're increasing our fair value estimate for the wide-moat firm.


Wide-moat  Costco’s (COST) third-quarter results place the firm moderately ahead of our full-year estimates, and as such, we intend to increase our $173 fair value estimate by a low-single-digit percentage. While we haven’t wavered on our thinking that Costco has amassed a sustainable competitive edge (as supported by renewal rates which exceeded 90% in the U.S., up from 87% a year ago), shares trade more than 10% above our valuation, and we’d suggest investors await a more attractive risk/reward proposition. The firm’s top line grew 12% (on top of 8% growth last year), driven by a 10.2% comparable-sales increase (5.1% traffic and 4.9% ticket). Further, operating margins held flat at 3.3% (against our flat full-year estimate of 3.3%). In an operating environment where a number of its peers are chalking up profit compression, we think Costco's results support our contention that it maintains a strong cost position within the industry.

While e-commerce remains a small piece of the firm's business currently (at less than 5% of sales), we view its growth in this channel (up 36.8%, on top of the near 20% last year) as evidence that Costco can cater to the changing consumer shopping habits that are gravitating online. These efforts also extend to its omnichannel experience (order online/pick-up in store), which management qualitatively mentioned as driving more consumers into the store. This omnichannel cycle may also increase the firm's brand awareness, which can help support its grocery delivery (both dry and fresh). Although nascent, we think the firm's expansion in this category (to all 520 U.S. warehouses by the end of the year) will also support its e-commerce (and sales growth) efforts (although details are sparse still). In the aggregate, we don't intend to alter our long-term outlook, calling for 6% top-line growth and 3.5% operating margins (which compares with its five-year average of 3.1%, as we incorporate increased economies of scale).

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

John Brick, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.