Strong End to Fiscal 2020 Showcases Costco’s Strength

Our $286 per share valuation of wide-moat Costco COST should rise by a mid-single-digit percentage after it reported strong fourth-quarter earnings, as the pandemic led sales higher with better-than-expected margins as the firm benefited from cost leverage and a relatively promotion-light competitive environment. We still believe the pandemic’s near-term effects are largely separate from Costco’s long-term prospects and continue to call for mid-single-digit top-line growth and 3% operating margins over the next decade. We suggest investors await a more attractive entry point despite our favorable view of the firm and its competitive advantages.

Adjusted quarterly comparable sales rose 14%, easily clearing our 7% expectation going into the period. For the fiscal year, Costco saw $166.8 billion in revenue against a 3.3% operating margin on its way to $9.02 in diluted EPS, each ahead of our prior $164.7 billion, 3.1%, and $8.58 respective targets. We had expected sales growth to ebb as stay-at-home orders eased, but continued resilience in discretionary categories despite economic angst propelled results.

E-commerce sales rose by more than 90% in the quarter, excluding sales made through third parties (particularly Instacart, which fulfills most of Costco’s same-day grocery orders). The firm continues to take a measured approach to expanding its online capabilities, which we believe is prudent considering its assortment and aggressive pricing. We similarly believe its cautious approach to new store openings is wise. Although Costco’s targeted 20- to-25-unit net warehouse opening target could arguably move higher, we believe its more prudent approach increases the quality of its store base and allows it to develop a strong understanding of newer markets (particularly internationally). We believe Costco’s conservatism has helped it keep its membership renewal rates high (91% in the U.S. and Canada and 88% worldwide) despite expansion into new markets at home and abroad.

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