Costco: Despite an Enviable Industry Position and Favorable Growth Runway, Shares Look Expensive

We modestly lower our fair value estimate on wide-moat Costco COST 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.

Even with this, we commend Costco for developing a vast physical footprint in North America (the firm operates 591 warehouses in the U.S. and 107 in Canada) and for commanding over 60% market share in the domestic warehouse club industry, per Euromonitor. With a unique membership model predicated on offering the lowest-priced goods in bulk quantities and a strong presence in food and beverage categories, the firm’s value proposition tends to resonate with consumers regardless of the economic backdrop. This is evidenced by its 10-year average comparable sales growth (excluding fuel) of 7% and 90% global member renewal rate in fiscal 2022. We surmise that Costco is adequately positioned to capture a larger share of consumers’ wallets in its home market for years to come—we forecast U.S. comparable sales to grow by a mid-single-digit percentage—though we note the firm faces staunch competition from digital retailers and likely needs to enhance its omnichannel fulfillment offerings.

Furthermore, we look favorably upon Costco’s international growth prospects given the firm has seemingly developed a successful formula for cross-border expansion. We anticipate Costco will gradually expand upon its existing physical presence of 163 international warehouses (excluding Canada) before pursuing more aggressive expansion later in our 10-year forecast. Our expectation for improving renewal rates and for Costco to grow international wallet share contribute to our forecast for low-double-digit international growth.