Costco Wholesale‘S (NASDAQ: COST) Share prices have risen almost 80% in the past three years S&P500 about 30% progress. The warehouse retailer outperformed the market as it impressed investors with its consistent growth and resilience to economic headwinds.
But can Costco stay ahead of the market over the next three years? Below is an overview of the business model, expected growth rates and valuations to help you decide.
Costco leverages its scale to buy and sell its products at much lower prices than many other brick-and-mortar retailers. It also encourages its customers to make bulk purchases of products to save money.
It can afford to sell its products at such low margins because it is a members-only warehouse club that generates most of its profits from higher-margin membership fees. It also consistently opens more warehouses to reach new customers.
Therefore, Costco’s core business will remain healthy as long as it grows comparable store sales, acquires new members, maintains high renewal rates and continues to open new warehouses. This is what has happened over the past three financial years.
|
Metric |
Financial year 2022 |
Financial year 2023 |
Financial year 2024 |
|---|---|---|---|
|
Adjusted* comp growth |
10.6% |
5.2% |
5.9% |
|
Total cardholders |
118.9 million |
127.9 million |
136.8 million |
|
Global renewal rate |
90.4% |
90.4% |
90.5% |
|
Total warehouses |
838 |
861 |
891 |
Data source: Costco. Chart by author. *Excluding fuel and exchange rate differences. The last financial year ended on September 1, 2024.
Costco also raised its membership fees in September for the first time in seven years. These higher fees should counter inflation, offset the company’s logistics costs for its e-commerce operations and support recent wage increases in the US and Canada.
In fiscal 2025, Costco plans to open 29 new stores (including three relocations), with 12 new stores for the U.S. market. The company also expects to see the benefits of the higher membership contributions in the second half of the year.
From fiscal 2024 to fiscal 2027, analysts expect Costco’s revenue to grow at a compound annual growth rate (CAGR) of 7%, while earnings per share (EPS) will rise at a CAGR of 10%. That stable outlook suggests it will remain an evergreen investment as the company continues to expand its lineup, attract new members and open new stores.
By comparison, analysts expect Walmart – which competes with Costco with its Sam’s Club warehouses – to grow its revenue and earnings per share at a CAGR of 5% and 17%, respectively, from fiscal 2024 to fiscal 2027 (which ends in January 2027).
Costco’s core businesses look healthy, but its shares are richly valued at 56 times this year’s earnings. Walmart is trading at 40 times earnings this year, compared to its smaller warehouse rival BJ’s Wholesaletrades at just 25 times this year’s earnings.
The bulls will argue that Costco deserves its premium valuation because it has a wide moat, is well insulated against macroeconomic and competitive headwinds, and will continue to grow steadily for the foreseeable future. The bears will argue that Costco’s valuations have been inflated by a flight to safe haven stocks in recent years, as well as the market’s recent rally in anticipation of lower interest rates. Costco’s low dividend yield of 0.5% won’t attract serious investors either.
Costco is a reliable long-term investment, but it is currently priced for perfection. Investors can gradually build up in Costco stock today, but shouldn’t be surprised if it gets a little cheaper during a market downturn over the next three years.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.
Where Will Costco Stock Be in Three Years? was originally published by The Motley Fool
