Trading at record highs thanks to 60% rally over the past 12 months, Costco Wholesale (NASDAQ: COST) Stocks can be a little intimidating. It feels like a relapse is on the horizon. And maybe that’s exactly what’s in the cards.
Perhaps the biggest risk here, however, lies at the other end of the continuum. That is, if you wait any longer to buy this red-hot name, it could prove costly as you miss out on more benefits. After all, this stock has a long history of linking even more gains to past gains.
There are actually four specific reasons why Costco stock could easily continue its current rally.
1. Costco’s business model works
Let’s start with the obvious: Costco’s business model clearly works.
Costco Wholesale is a club-based retailer. With just a cursory glance, it looks a lot like it Walmart (NYSE:WMT), Kroger (NYSE: KR)or Goal (NYSE: TGT). However, there are important differences between Costco and most comparable retailers. That is, shopping at a Costco store requires a paid membership in the “club.” The company also sells more of its goods in bulk to provide value.
Considering that Costco has been the company it is today since the 1990s, you might think that consumers would eventually get tired of paying a retailer just for the right to shop in its stores. You might also expect that company’s competitors to respond with something similar. And for the record, Walmart has; The nation’s nearly 600 Sam’s Club warehouses are actually owned and operated by Walmart.
However, Costco’s value proposition is still clicking with consumers. Although annual membership fees are occasionally increased (memberships now start at $60 per year and quickly escalate for more benefits), the company boasts a record 74.5 million paid memberships as of early May, up nearly 8% from the year before . This strength is underlined by an annual global membership renewal rate of 90.5%, and an even better 93% renewal rate within the all-important US/Canadian market. That’s impressive.
2. E-commerce offers enormous growth opportunities
Even as almost all other retailers got waist deep into e-commerce a few years ago, Costco chose to stay focused on driving people into its stores. Then the COVID-19 pandemic hit, forcing the company to step up its online game. And that happened successfully.
However, the retailer has only scratched the surface of its e-commerce capabilities. It is believed that less than 5% of total sales are generated online, compared to more than 10% for Walmart, and even more than for Target. Just by catching up with its competitors’ e-commerce business, Costco should be able to accelerate its current overall growth.
And Costco does just that. Last month’s online sales rose 15.3% year over year, compared to Costco’s companywide sales growth of 6.4%. This improvement follows a 14.6% increase in online sales in April, while total sales grew only 5.6%. In March, the retailer’s e-commerce activity grew by a hefty 28.3%, versus a company-wide increase of 7.7%.
Connect the dots. Costco is starting to take its online presence very seriously, creating new growth opportunities.
3. Costco looks beyond just consumer goods
Costco’s roots lie largely in the grocery industry, which lends itself to bulk sales. However, the retailer has been slowly moving deeper into other categories since its inception. Clothing, electronics, appliances and other expensive items have been part of the inventory mix for years.
However, the company can take its exposure to the discretionary part of the retail world to the next level.
In any case, that is the conclusion from the most recent quarterly report. As CFO Gary Millerchip made clear during last month’s earnings call, “As inflation has leveled off, our members are returning to purchasing more luxury items. And category growth was led by toys, tires, lawn and garden, and health and beauty aids.”
The warehouse retailer is also expanding its inventory selection in thoughtful ways. For example, capitalizing on the existing appeal of its own brand, Kirkland Signature, Costco recently introduced KS Walking Shoes and KS Makeup Removing Wipes. You may also recall that the company recently achieved great success selling gold bars.
It wouldn’t be right to even compare Costco to Target, Walmart or Kroger. The retailer still seems to understand that its edge lies largely in how it is different from its more conventional competition. The company appears to be successfully testing products outside its usual range, but broadening its appeal.
4. There is also room to expand the store/footprint
Last but not least, while Costco has been building stores for a long time, it’s not like Costco has run out of places and reasons to build new stores.
At last count, Costco operates nearly 880 stores, most of which are located in North America. That’s a lot.
But maybe that’s not the case. For perspective, in addition to the nearly 600 Sam’s Club Warehouses, there are more than 4,600 Walmart stores in the United States alone, plus Target’s nearly 2,000 U.S. locations. The United States is home to nearly 2,800 Kroger or Kroger-owned supermarkets. Now that is a lot of.
There are so many stores that interested investors may wonder whether Costco can successfully expand its existing footprint. It’s a particular concern in light of the fact that Walmart, Kroger and now Target all offer some sort of subscription/members-only shopping experience that could perhaps lure a paying customer away from Costco.
The fact is, however, that Costco is arguably as complementary to Walmart as any of its competitors.
While the country may not need 4,600 Costco stores, the 600 Costcos currently located in the US are doing just fine, despite the fact that most (if not all) of them are located near a Walmart and/or Target store. Same-store sales in the US rose 6% last quarter. Companywide, they amounted to 6.5%, continuing and accelerating growth. This growth was also significantly better than Walmart’s US sales growth of 3.8% over the same period.
Given continued same-store sales growth, the 29 stores Costco expects to build during the fiscal year ending in early August are just an illustration of the kind of store growth that’s likely to come.
Should You Invest $1,000 in Costco Wholesale Now?
Consider the following before buying shares in Costco Wholesale:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Costco Wholesale wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $740,688!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns June 3, 2024
James Brumley has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
4 Reasons to Buy Costco Stock Like There’s No Tomorrow was originally published by The Motley Fool
