Costco Earnings: Continued Top-Line Growth Reinforces the Retailer’s Wide Moat, but Shares Look Rich

We were impressed by wide-moat Costco’s fiscal 2024 second-quarter results as the firm’s attractive product assortment and low prices continued driving strong traffic through its warehouses. Net sales improved nearly 6% to over $57 billion, driven by a robust 5.8% increase in companywide comparable sales (excluding fuel and foreign currency fluctuations). In the US, Costco’s comparable sales growth of 4.8% exceeded our 3.5% forecast amid a stronger-than-expected 4.3% uptick in volume, with management citing revenue growth across each of its core merchandise categories. Internationally, comparable sales again expanded at a high-single-digit pace—9.0% in Canada and 8.2% in other international markets—as the retailer’s banner continues to garner global merit. Costco’s continued top-line success and 3.5% operating margin—exceeding our 3.4% estimate as management cited tighter expense control during the quarter—translated into adjusted earnings per share of $3.71 during the quarter, which outpaced our forecast by about 4%. We maintain that Costco’s vast scale and merchandising strategy prompts an enviable cost advantage in a crowded retail environment. The firm's continued membership gains—global membership count rose 8% year over year to over 73 million—and expanding share of consumers’ wallets allow the retailer to pass growing volumes through its more than 870 global warehouses, reinforcing its scale-driven cost advantage. We plan to raise our $480 fair value estimate by a mid-single-digit percentage as we make a favorable adjustment to our near-term revenue outlook. However, we still view Costco’s shares as overvalued.