Costco Earnings: Continued Top-Line Growth Reinforces the Retailer’s Wide Moat

Key Morningstar Metrics for Costco

• Fair Value Estimate: $480.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Costco’s Earnings

We were impressed by Costco’s COST fiscal second-quarter results, as the firm’s attractive product assortment and low prices continued to drive 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 reinforce its scale-driven cost advantage. We plan to raise our fair value estimate for the firm’s stock of $480 per share by a mid-single-digit percentage as we make a favorable adjustment to our near-term revenue outlook. However, we still view the shares as overvalued.

Costco clocked a 90.5% global renewal rate in the quarter (92.9% in the US and Canada), and management reaffirmed its commitment to opening new warehouses, with 28 planned for fiscal 2024. Despite operating over 600 warehouses in the US, we think Costco has room to add at least 100 more over the next decade.