Costco Earnings: Strong Value Proposition and Loyal Member Base Drive Further Traffic Gains

Wide-moat Costco delivered solid results during its fiscal first-quarter 2024 as the firm continued attracting customers to its warehouses. The retailer’s EPS of $3.58 exceeded our expectation by about 6% as the firm’s 3.4% operating margin was up 20 basis points over the prior year and slightly outpaced our estimate due to improved profitability from gasoline sales and e-commerce. Net sales improved 6.1% to nearly $57 billion during the quarter, driven by a 3.9% increase in company-wide comparable sales (excluding the impact from gasoline prices and foreign-exchange fluctuations) as global shopping frequency, or traffic, growth of 4.7% helped offset a 0.9% decline in the average transaction size. In the U.S., comparable sales growth moderated further from the robust pace of the prior 4 years to 2.6%. That said, a more tepid pace of spending was to be expected and we're encouraged by the firm’s robust 3.6% traffic gains. Internationally, Costco continues to drive strong growth, with comparable sales expanding at a high-single-digit rate (8% in Canada and 7% in other international markets). We believe Costco is poised to grow its top- and bottom line further in future via membership gains and increasing wallet share as the firm’s enticing value proposition of quality goods in bulk quantities at low prices resonates with consumers. We plan to raise our $460 fair value estimate for Costco by a low- to mid-single-digit percentage as our long-term outlook remains intact, though we view shares as overvalued.