Company Reports

Despite operating amid a cutthroat retail industry where competitive advantages are difficult to manifest and omnichannel penetration continues to burgeon from the likes of wide-moats Amazon and Walmart, we believe Costco boasts a unique edge due to its loyal membership base, meticulous cost management, and impressive scale.

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.

Despite operating amid a cutthroat retail industry where competitive advantages are difficult to manifest and omnichannel penetration continues to burgeon from the likes of wide-moats Amazon and Walmart, we believe Costco boasts a unique edge due to its loyal membership base, meticulous cost management, and impressive scale.

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.

Wide-moat Costco announced CEO Craig Jelinek’s intention to step down from the role at the end of the year, marking an imminent end to his impressive 12 years at the helm. Ron Vachris, Costco’s current president and COO, will officially succeed Jelinek on Jan. 1, 2024. The management change does not alter our long-term outlook for Costco, and we maintain our $460 fair value estimate and our Exemplary Capital Allocation Rating. Still, shares look overvalued to us.

Despite operating amid a cutthroat retail industry where competitive advantages are difficult to manifest and omnichannel penetration continues to burgeon from the likes of wide-moats Amazon and Walmart, we believe Costco boasts a unique edge due to its loyal membership base, meticulous cost management, and impressive scale.

Wide-moat Costco delivered a fiscal fourth quarter that was mostly in line with our expectations. Net sales expanded by 9% to over $77 billion during the quarter and comparable sales (excluding gasoline prices and foreign currency impacts) improved by nearly 4% as customers continued to flock to Costco’s banner. The retailer posted global traffic growth of 5.2% during the quarter, though a pullback in spending on big-ticket discretionary items and fuel price deflation weighed on the average ticket. Despite operating amid an uncertain economic backdrop, we surmise Costco boasts an enviable industry position given the retailer’s enticing value proposition and resounding customer base, leaving our long-term outlook intact. As such, we don't expect to alter our $450 fair value estimate materially, and we view shares as overvalued.

We modestly lower our fair value estimate on wide-moat Costco to $450 per share, from $490 previously, due to a slight pullback in our midcycle operating margin forecast to 4.0% (from 4.2%). While we expect the retailer to further leverage its fixed costs over a robust sales base in coming years, we anticipate Costco will follow its historical precedent of reinvesting some profits into lower unit selling prices to drive volume growth, keeping gross margins anchored.

Despite operating amid a cutthroat retail industry where competitive advantages are difficult to manifest and omnichannel penetration continues to burgeon from the likes of wide-moats Amazon and Walmart, we believe Costco boasts a unique edge due to its loyal membership base, meticulous cost management, and impressive scale.

With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, we expect Costco’s durable competitive advantages to lead to consistent, strong performance despite retail’s upheaval. The competitive environment is intense and becoming more challenging as Amazon scales and physical rivals deliver an omnichannel experience, but we believe the value Costco offers (driven by cost leverage, procurement strength, and top-class store efficiency) should allow it to keep traffic high.

With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, we expect Costco’s durable competitive advantages to lead to consistent, strong performance despite retail’s upheaval. The competitive environment is intense and becoming more challenging as Amazon scales and physical rivals deliver an omnichannel experience, but we believe the values that Costco offers (driven by cost leverage, procurement strength, and top-class store efficiency) should allow it to keep traffic high. With ample opportunity to expand globally, we expect Costco to post consistently strong returns even as it grows.

Our $490 per share valuation of wide-moat Costco should not change significantly after it posted third-quarter earnings, with the impact of sluggish sales offset by a time value of money-related adjustment. With the lackluster sales growth attributable to transitory factors like pressure on discretionary spending from economic uncertainty and price inflation ebbing faster than we foresaw, our long-term forecast should not change much (mid- to high-single-digit annual percentage revenue growth, operating margins approaching 4%). We have a favorable view of Costco’s prospects, but with the shares trading near our valuation, we suggest investors seek a wider margin of safety.

With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, we expect Costco’s durable competitive advantages to lead to consistent, strong performance despite retail’s upheaval. The competitive environment is intense and becoming more challenging as Amazon scales and physical rivals deliver an omnichannel experience, but we believe the values that Costco offers (driven by cost leverage, procurement strength, and top-class store efficiency) should allow it to keep traffic high. With ample opportunity to expand globally, we expect Costco to post consistently strong returns even as it grows.

We don’t plan a material change in our $476 fair value estimate for wide-moat Costco after digesting fiscal 2023 second-quarter results that came in a touch below our estimates. Its total revenue of $55.3 billion (up 6.5%) and operating margin of 3.4% fell short of our estimates of $55.8 billion and 3.5%, respectively. Nonetheless, we maintain our projections for mid- to high-single-digit annual revenue growth and operating margins around 4% over our 10-year explicit forecast, as our long-term prospects for the business remains intact. With shares trading near our existing intrinsic valuation, we’d suggest investors await a more attractive entry point.

With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, we expect Costco’s durable competitive advantages to lead to consistent, strong performance despite retail’s upheaval. The competitive environment is intense and becoming more challenging as Amazon scales and physical rivals deliver an omnichannel experience, but we believe the values that Costco offers (driven by cost leverage, procurement strength, and top-class store efficiency) should allow it to keep traffic high. With ample opportunity to expand globally, we expect Costco to post consistently strong returns even as it grows.

We do not plan to alter our $476 per share valuation of wide-moat Costco significantly after it posted first-quarter sales that conformed with our expectations, but more margin pressure than we anticipated. A time value of money-related adjustment should offset the valuation impact of the profitability shortfall. The cost pressure reflects transitory factors rather than a change in the company’s long-term positioning, and so we still assume mid- to high-single-digit annual percentage revenue growth and operating margins approaching 4% over the next decade. We have a favorable view of Costco’s competitive standing and its growth prospects, but with the shares trading near our valuation, we suggest investors seek a margin of safety.

With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, we expect Costco’s durable competitive advantages to lead to consistent, strong performance despite retail’s upheaval. The competitive environment is intense and becoming more challenging as Amazon scales and physical rivals deliver an omnichannel experience, but we believe the values that Costco offers (driven by cost leverage, procurement strength, and top-class store efficiency) should allow it to keep traffic high. With ample opportunity to expand globally, we expect Costco to post consistently strong returns even as it grows.

Our $454 per-share valuation of wide-moat Costco should not change materially after it announced fourth-quarter (ended Aug. 28) earnings that approximated our expectations. With the warehouse club’s ongoing resilience despite inflation (unsurprising considering the chain’s long record of strong performance in a variety of economic environments), we see little reason to change our long-term expectations, which call for mid- to high-single-digit annual percentage revenue growth and operating margins approaching 4% over the next decade. While we continue to see Costco as one of the most competitively advantaged retailers worldwide, we suggest prospective investors seek a greater margin of safety (the shares were little changed in after-hours trading, trading modestly higher than our valuation.)

With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, we expect Costco’s durable competitive advantages to lead to consistent, strong performance despite retail’s upheaval. The competitive environment is intense and becoming more challenging as Amazon scales and physical rivals deliver an omnichannel experience, but we believe the values that Costco offers (driven by cost leverage, procurement strength, and top-class store efficiency) should allow it to keep traffic high. With ample opportunity to expand globally, we expect Costco to post consistently strong returns even as it grows.

Our $471 per share fair value estimate should not change much after wide-moat Costco posted third-quarter earnings (similar to the after-hours trading reaction to the news), with a time value of money-related adjustment offsetting the impact of lower-than-expected profitability (3.4% operating margin versus our 3.9% forecast). About half of the difference was attributable to the firm awarding employees an extra holiday, with the remainder coming from cost pressure as Costco balances profitability with membership value. Our long-term forecast calls for mid- to high-single-digit annual percentage revenue growth and 4% operating margins over the next decade. With the shares trading near their valuation, we suggest investors seek more of a margin of safety.